We present a theoretical framework to characterize how financial market participants contribute to systemic risk, allowing us to derive optimal corrective policy interventions. To that end, we embed belief heterogeneity in a model of frictional financial markets. We document the asymmetry that,...

We present a theoretical framework to characterize how financial market participants contribute to systemic risk, allowing us to derive optimal corrective policy interventions. To that end, we embed belief heterogeneity in a model of frictional financial markets. We document the asymmetry that,...

We characterize the optimal linear tax on capital in an Overlapping Generations model with two period lived households facing uninsurable idiosyncratic labor income risk. The Ramsey government internalizes the general equilibrium effects of private precautionary saving on factor prices and taxes...