We attempt to explain the overreaction of asset prices to movements in short-term interest rates, dividends, and asset supplies. The key element of our explanation is a margin constraint that traders face which limits their leverage to a fraction of the value of their assets. Traders may lever...

This paper investigates the impact on aggregate variables of changes in government consumption in the context of a stochastic, neoclassical growth model. We show, theoretically, that the impact on output and employment of a persistent change in government consumption exceeds that of a temporary...

We consider a random matching model where agents have complete access to each others' histories. Exchange is motivated by risk sharing given random unobservable incomes. There is capital accumulation and an endogenous interest rate. The key feature of this environment is that information is...

(iii) Transaction velocities are much higher for liquid assets than for stocks, specifically, we explore the extent to which incorporating an explicit motive for holding liquid assets can explain the above observations. We introduce a demand for liquid assets by adding uninsured individual risk...

In an economy studied by Lucas and Stokey, tax rates inherit the serial correlation structure of government expenditures, belying Barro's earlier result that taxes should be a random walk for any stochastic process of government expenditures. To recover a version of Barro's random walk...

We attempt to explain the overreaction of asset prices to movements in short-term interest rates, dividends, and asset supplies. The key element of our explanation is a margin constraint that traders face which limits their leverage to a fraction of the value of their assets. Traders may lever...