We show theoretically that inflation disagreement drives a wedge between real and nominal yields and raises their levels and volatilities. We demonstrate empirically that an inflation disagreement increase of one standard deviation raises real and nominal yields and their volatilities,...

In a production economy, in which agents have heterogeneous beliefs and a social planner has incomplete knowledge about which beliefs are correct, we introduce the concept of Incomplete Knowledge (IK) efficiency. IK-inefficient allocations can be improved upon without taking a stand on which...

When investors disagree and trade on their views about asset returns, market prices reflect the wealth/consumption share weighted average belief about risk premia, where more accurate, risk tolerant, or patient investors carry a larger weight. We explore the properties of this market view, and...

With overlapping generations and heterogeneous risk aversion there is no unique relation between aggregate risk aversion and the real rate of interest, and this type of endogenous “noise” cannot arise in an economy where agents live forever. Our framework accommodates many agent types and...

Recessions lead to substantial, yet not immediate drop in output. The low and often negative growth during recessions is typically followed by a steady recovery with abnormally high growth. We propose a theory where a recession is preceded by the introduction of a new risk source. The expected...