Public-sector pension plans administered by CalPERS face scrutiny because of large unfunded liabilities. The current underfunding is usually blamed on investment losses that occurred during the recent economic downturn. This paper finds that the true culprit is inaccurate actuarial forecasting,...

We combine a simple agent-based model of financial markets and a New Keynesian macroeconomic model with bounded rationality via two straightforward channels. The result is a macroeconomic model that allows for the endogenous development of business cycles and stock price bubbles. We show that...

High rates of government investment in public sector capital forecast high risk premiums both at the aggregate and firm-level. This result is in sharp contrast with the well-documented negative relationship between the private sector investment rate and risk premiums. To explain the empirical...

The surge in public debt triggered by the financial crisis has raised uncertainty about future tax pressure and economic activity. We examine the asset pricing effects of fiscal policies in a production-based general equilibrium model in which taxation affects corporate decisions by: i)...

We formalize the idea that the financial sector can be a source of non-fundamental risk. Households' desire to hedge against price volatility can generate price volatility in equilibrium, even absent fundamental risk. Fearing that asset prices may fall, risk-averse households demand safe assets...

The paper studies the constrained efficiency of the aggregate stock market in which the investor obtains gain-loss utility directly from fluctuations in asset returns, in addition to consumption. I reveal that the competitive equilibrium is inefficient without any frictions as long as the agent...

We examine next-day newspaper accounts of large daily jumps in 16 national stock markets to assess their proximate cause, clarity as to cause, and the geographic source of the market-moving news. Our sample of 6,200 market jumps yields several findings. First, policy news – mainly associated...

We show the competing effects of a housing bubble on the real economy by developing a two-sector dynamic model with housing production. On the one hand, firms can sell or collateralize their houses to obtain financing, so a housing bubble helps firms obtain credit to finance their investment and...