In this paper, we show that incomplete markets lead to trade imbalances. We use a two-period general equilibrium model with countries composed of heterogeneous households. We look at a world where, when markets are complete, countries engage in balanced trade; and we show that when some of those...

Millions of Americans have negative housing equity, meaning that the outstanding balance on their mortgage exceeds their home's current market value. Our data show that the overwhelming majority of these households will not lose their homes. Our finding is consistent with historical evidence: we...

In this paper, we show that incomplete markets lead to trade imbalances. We use a two-period general equilibrium model with countries composed of heterogeneous households. We look at a world where, when markets are complete, countries engage in balanced trade and we show that when some of those...

Shiller (2003) and others have argued for the creation of financial instruments that allow individuals to insure risks associated with their lifetime labor income. In this paper, we argue that while the purpose of such assets is to smooth consumption across states of nature, one must also...