We develop a macroeconomic model in which liquidity plays an essential role in the production process, because firms have a commitment problem regarding factor payments. A liquidity crisis occurs when firms fail to obtain sufficient liquidity, and may be caused either by self-fulfilling beliefs...

We build a model economy in which a shortage of safe assets can create conditions for intrinsically useless `safe' bubble assets to circulate at a positive price. Our environment features infinitely lived individuals who are not subject to credit constraints but who face uninsurable...

We compare the dynamics of in flation and bond yields leading up to a sovereign debt crisis in settings where asset markets are frictionless to other settings with financial fric- tions. As compared to the case with frictionless asset markets, an asset market structure with financial frictions...

When individuals' labor and capital income are subject to uninsurable idiosyncratic risks, should capital and labor be taxed, and if so how? In a two period general equilibrium model with production, we derive a decomposition formula of the welfare effects of these taxes into insurance and...

We provide two ways to reconcile small values of the intertemporal elasticity of substitution (IES) that range between 0.35 and 0.5 with empirical evidence that the IES is large. This is done using a model in which all agents have identical preferences and the same access to asset markets. We...

How should capital and labor be taxed when individuals' labor income is subject to unin- surable idiosyncratic risks? To address this question, we develop a tractable infinite horizon model with incomplete markets and consider a dynamic optimal taxation problem with linear taxes on the wage and...

Using a two-country New Open Economy Macroeconomics model, we analyze how monetary policy should respond to a "global liquidity trap," where the two countries may fall into a liquidity trap simultaneously. We first characterize optimal monetary policy, and show that the optimal rate of infl...

We consider an economy where individuals face uninsurable risks to their human capital accumulation, and analyze the optimal level of linear taxes on capital and labor income together with the optimal path of government debt. We show that in the presence of such risks it is beneficial to tax...