In a model with multiple Pareto-ranked equilibria we add trade in assets that pay based on the realization of a sunspot. Asset trading restricts the equilibrium set in a way that raises welfare by eliminating equilibria with a high likelihood of disasters. When the probability of a disaster is...

I solve for the optimal (state-contingent) contract and find that moral hazard friction is sufficient to explain capital outflows in low output states –- a defining feature of the emerging markets business cycles. On the other hand, the model that also includes limited enforcement is...

Substantial progress has been made in recent years in integrating optimal portfolios into (open macro) general equilibrium models using standard local approximation (perturbation) methods. We compare these perturbation-based portfolio solution methods with a global portfolio solution method to...