We investigate a neoclassical economy with heterogeneous agents, convex technologies and idiosyncratic production risk. Combined with precautionary savings, investment risk generates rich effects that do not arise in the presence of pure endowment risk. Under a finite horizon, multiple growth...

We revisit the question of why shifts in aggregate demand drive business cycles. Our theory combines intertemporal substitution in production with rational confusion, or bounded rationality, in consumption and investment. The first element allows aggregate supply to respond to shifts in...

We document a new fact about expectations: in response to the main shocks driving the business cycle, expectations underreact initially but overshoot later on. We show how previous, seemingly conflicting, evidence can be understood as different facets of this fact. We finally explain what the...

This paper investigates how incomplete information impacts the response of prices to nominal shocks. Our baseline model is a variant of the Calvo model in which firms observe the underlying nominal shocks with noise. In this mode, the response of prices is pinned down by three parameters: the...

This paper investigates a real-business-cycle economy that features dispersed information about the underlying aggregate productivity shocks, taste shocks, and - potentially - shocks to monopoly power. We show how the dispersion of information can (i) contribute to significant inertia in the...

We develop a tractable method for augmenting macroeconomic models with autonomous variation in higher-order beliefs. We use this to accommodate a certain type of waves of optimism and pessimism that can be interpreted as the product of frictional coordination and, unlike the one featured in the...

This paper revisits the macroeconomic effects of government consumption in the neoclassical growth model augmented with idiosyncratic investment (or entrepreneurial) risk. Under complete markets, a permanent increase in government consumption has no long-run effect on the interest rate, the...