The author surveys work on the intersection between macroeconomics and finance. The challenge is to find the right measure of "bad times," rises in the marginal value of wealth, so that we can understand high average returns or low prices as compensation for assets' tendency to pay off poorly in...

I address the controversy over whether the financial services industry is "too big." We should be asking whether the finance industry is functioning properly instead. The facts suggest that demand for financial services increased, perhaps temporarily, rather than suggesting a changing distortion...

Mean-variance portfolio theory can apply to the streams of payoffs such as dividends following an initial investment, in place of one-period returns. This description is especially useful when returns are not independent over time and investors have non-marketed income. Investors hedge their...

In standard solutions, the new-Keynesian model produces a deep recession with deflation in a liquidity trap. The model also makes unusual policy predictions: Useless government spending, technical regress, and capital destruction have large multipliers. These predictions become larger as prices...

This insightful collection examines the intersection between macroeconomics and finance. The key challenge in this area is to find the right measure of ‘bad times’ (the marginal value of wealth) to explain some assets’ high average returns or low prices as compensation for those assets'...

I analyze monetary policy with interest on reserves and a large balance sheet. I show that conventional theories do not determine inflation in this regime, so I base the analysis on the fiscal theory of the price level. I find that monetary policy can peg the nominal rate, and determine expected...

The author surveys the statistical evidence on average stock return and the economic theories that try to explain it. The statistical evidence suggests a period of low returns, followed by a slow reversion to a high long-term average. However, that evidence is quite uncertain. Standard economics...

How does traditional portfolio theory adapt to the new facts? The old "two-fund" theorem becomes a "many-fund" theorem; some investors can improve returns by investing in portfolio strategies that let them take on nonmarket sources of risk; and other investors can shed nonmarket risks in the...

In the last 15 years, the cherished "random walk" view that stock returns are unpredictable, the "CAPM" view the market is the only benchmark and market exposure the only source of returns, and the "expectations hypothesis" relating interest rates of various maturities and countries have all...