incomplete markets and econometrics, anyone?

[philecon]

Hi, I have two questions about some economics classes. First off, the economics department at my school is offering a special topics course on incomplete markets. Before I try to enlist in this class, I'd like to know what incomplete markets is all about. Also, do you need matrix algebra to be able to understand undergraduate econometrics? I was able to enlist into an undergraduate econometrics class, and I'm a bit apprehensive about taking it. Thanks!

[asianeconomist]

You'll need matrix algebra for instance in deriving the OLS estimators for standard linear regression model. I do not know to which depth your course will go, but in typical UGrad texts (Gujrati, Wooldridge) the matrix algebra required is not very complex and can be picked up during the course. However, you do need to take a Linear Algebra course.

[TruDog]

The general idea of incomplete markets is that there is not an Arrow-Debreu security available for each state of the world. That has the effect of lowering the equilibrium interest rate to Beta*(1+r)<1, which suggests that there is precautionary saving due to the lack of complete markets and the inability to entirely diversify away 'excess' risk.

Truman Bewley at Yale and the late S. Rao Aiyagari are two leaders in the field of incomplete markets. Aiyagari's paper Uninsured Idiosyncratic Risk and Aggregate Saving (incomplete markets and econometrics, anyone?) is a good introduction to the topic.

[TruDog]

Double post.