We provide a continuous-time “risk-centric” representation of the New Keynesian model, which we use to analyze the …

institutions facing the same uncertainty. This is due to an option value of rent-seeking whereby the prospect of potentially … assumptions: Economic risk is high relative to political risk, markets are sufficiently incomplete, and there exists a rent …

In this paper we: (i) provide a model of the endogenous risk intolerance and severe aggregate demand contractions … addressing these contractions. The key mechanism stems from heterogeneous risk tolerance: as a recessionary shock hits the … economy and brings down asset prices, risk-tolerant agents' wealth share declines and their leverage rises endogenously. This …

explicitly absorb a larger share of the systemic risk. The options for doing this range from surplus countries rebalancing their … securitization industry while removing the systemic risk from the banks' balance sheets. Such public-private solutions could be …

We study the effects of aggregate and idiosyncratic uncertainty on the entry of firms, total investment, and prices in … of different sources of uncertainty. We then show how the conditional distribution of prices can be used as an …

collective bias in agents' expectations. Agents in the model make risk management decisions with incomplete knowledge. They … uncertainty as Knightian. We show that when aggregate liquidity is low, an increase in uncertainty leads agents to a series of … protective actions -- decreasing risk exposures, hoarding liquidity, locking-up capital -- that reflect a flight to quality …

We present a model of flight to quality episodes that emphasizes systemic risk and the Knightian uncertainty … surrounding these episodes. Agents make risk management decisions with incomplete knowledge. They understand their own shocks, but … are uncertain of how correlated their shocks are with systemwide shocks. Aversion to this uncertainty leads them to …