This paper develops a framework that integrates macroeconomic analysis and consumption-oriented asset valuation. All behavioral relations and valuation formulae are derived as results of optimal decisions of individuals or firms. Using the endogeneity of consumption and returns in the...

The existence of nominal wage and debt contracts is a puzzle. In a model with strategic complementarities, where imperfectly competitive firms inefficiently underinvest, nominal wage or debt contracts are shown to be preferred to indexed contracts. Nominal contracts are an optimal arrangement...

The paper explores how the structure of government debt affects the budget in a stochastic environment. In the theoretical part, I present two models that motivate why governments should care about the risk inherent in its choice of liabilities. The models are based on tax-smoothing and risk...

Many analyses of debt policy assume exogenous government expenditures. Instead, I use an optimizing model in which the government endogenously selects values of taxes, spending, and debt to maximize welfare. If demand for publicly provided goods is elastic, a debt-financed tax cut increases...

This paper develops a framework that integrates macroeconomic analysis and consumption-oriented asset valuation. All behavioral relations and valuation formulae are derived as results of optimal decisions of individuals or firms. Using the endogeneity of consumption and returns in the...

The paper makes a case for foreign currency debt as a hedging device in an open economy subject to stochastic shocks to output. A government can reduce uncertainty in net wealth and in consumption by issuing foreign or domestic currency debt, if unexpected domestic and foreign inflation are...

The paper derives the government budget constraint and studies the sustainability of deficits in a stochastic, dynamically efficient economy. Contrary to the intuition based on certainty models, policies with permanent expected primary deficits can be sustainable. Even an infinite string of...