This paper studies the optimal design of fiscal policy when financial markets are incomplete at the aggregate and microeconomic level. The government trades a non-state contingent bond (liability) and cannot insure against the uncertainty in future tax revenues, while households are unable to...

We introduce endogenous participation of market makers into a Kyle-type model with long-lived asymmetric information. The main result is that under a plausible parameter setting, the trading volume and price volatility show a U-shape with respect to time, meaning that the market trading...