We review how realistic frictions in information and/or rationality arrest general equilibrium (GE) feedbacks. In one specification, we maintain rational expectations but remove common knowledge of aggregate shocks. In another, we replace rational expectations with Level-k Thinking or a smooth...

A long-standing issue in the theory of monetary policy is that the same path for the interest rate can be associated with multiple bounded equilibrium paths for inflation and output. We show that a small friction in memory and intertemporal coordination can remove this indeterminacy. This leaves...

We study how fiscal deficits are financed in environments with two key features: (i) nominal rigidity and (ii) a violation of Ricardian equivalence due to finite lives or liquidity constraints. In such environments, deficits contribute to their own financing via two channels: a boom in real...

This paper shows how rational investors can have different degrees of optimism regarding the prospects of the economy, even if they share exactly the same information regarding all economic fundamentals. The key is that heterogeneity in expectations regarding endogenous outcomes can emerge as a...

This paper augments the neoclassical growth model to study the macroeconomic effects of idiosyncratic investment risk. The general equilibrium is solved in closed form under standard assumptions for preferences and technologies. A simple condition is identified for incomplete markets to result...

The notion that business cycles are driven by demand shocks is subtle. I first review some of the conceptual and empirical challenges faced when trying to accommodate this notion in micro-founded, general-equilibrium models. I next review my own research, which sheds new light on the observed...

We study the efficiency of competitive markets when people are rationally inattentive. Appropriate amendments of the Welfare Theorems hold if attention costs satisfy an invariance condition, which amounts to free disposal of decision-irrelevant aspects of the state of nature. This condition is...

Should a policymaker manage expectations by offering forward guidance in terms of the likely value of a future policy instrument or a target for an equilibrium outcome such as aggregate output? We study how the optimal approach depends on plausible bounds on agents' depth of knowledge and...

We revisit the question of why shifts in aggregate demand drive business cycles. Our theory combines intertemporal substitution in production with rational confusion (or bounded rationality) in consumption. The first element allows aggregate supply to respond to shifts in aggregate demand...

We document a new fact about expectations: in response to the main shocks driving the business cycle, expectations under-react initially but over-shoot later on. We show how previous, seemingly conflicting, evidence can be understood as different facets of this fact. We finally explain what the...