In this paper we derive a Phillips curve with a role for higher order expectations of marginal cost and future inflation. We introduce a small idiosyncratic component in firms’ marginal costs and let the economywide average marginal cost be unobservable to the individual firm. The model can...

Introducing extrapolative bias into a standard production-based model with recursive preferences reconciles salient stylized facts about business cycles (low consumption volatility, high investment volatility relative to output) and financial markets (high equity premium, volatile stock returns,...

We study the effects of diverse beliefs on equilibrium securitization. We provide a simple characterization of the optimal securities. Pooling and tranching of assets emerges in equilibrium as a consequence of traders' diverse beliefs about asset returns. Under risk neutrality, the issuer of...