Many would say that children are society’s most precious resource. So, how should it invest in them? To gain insight into this question, a dynamic general equilibrium model is developed where children differ by ability. Parents invest time and money in their offspring, depending on their...

Two problems exist in standard limited-participation models: (1) the liquidity effect is not as persistent as in the data; and (2) some nominal variables are unrealistically volatile. To address these problems, we introduce nominal wage, price, and portfolio adjustment costs, to better understand...