We develop a model of investment with financial constraints and use it to investigate the relation between investment and Tobin’s q. A firm is financed partly by insiders, who control its assets, and partly by outside investors. When insiders’ wealth is scarce, they earn a rate of...

Many individuals simultaneously have significant credit card debt and money in the bank. The so-called credit card debt puzzle is, given high interest rates on credit cards and low interest rates on bank accounts, why not pay down this debt? Economists have gone to some lengths to explain this....

The main contribution of this work is to provide a dynamic general equilibrium model of asset allocation, allowing to reconcile economic theory with several puzzling contradictions recently pointed out in the literature: (i) the asset allocation puzzle, (ii) the observed time-variation in...

Empirical evidence indicates local jurisdictions are internally more heterogenous than standard sorting models predict. We develop a dynamic multi-region model, with fluctuating regional house prices, where an owner-occupying household's location choice depends on its current wealth and its...

Housing wealth is a major component of households' wealth. Since house prices fluctuate considerably over time, an important question is how house price fluctuations affect households' consumption decisions. This may happen through at least two channels: (i) a wealth channel, or (ii) by relaxing...

This paper introduces a form of boundedly-rational expectations into an otherwise standard New-Keynesian Phillips curve. The representative agent's forecast rule is optimal (in the sense of minimizing mean squared forecast errors), conditional on a perceived law of motion for inflation and...

First-order approximations to the solution to a Dynamic Stochastic General Equilibrium Model (DGSE) are now widely used in the literature. In particular, the solution is usually based on the standard log-linearisation procedure around the steady-state. However, it may be not enough especially...