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(In)Stability and Informational Efficiency of Prices

By Gabriel Desgranges and Stéphane Gauthier

Abstract

This paper analyzes how agents coordinate their forecasts on a Rational Expectations Equilibrium under asymmetric information about fundamentals. We consider the class of linear one-dimensional models where the price is determined by price expectations. We find that REE stability is favored by a small sensitivity of the economy to forecasts, and, more surprinsingly, by a small proportion of informed agents. Still, price informational efficiency is favored by a small sensitivity of the economy to forecasts but also by a large proportion of informed agents, suggesting a conflict between the two issues of stabilizing fluctuations and transmitting information to the market

Topics: Common Knowledge, Coordination of Expectations, Informational Asymmetries, Rational Expectations Equilibrium. JEL classi…cation, C62, D82, D84
Year: 2013
OAI identifier: oai:CiteSeerX.psu:10.1.1.362.9464
Provided by: CiteSeerX
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