“Focus on the downside, and the upside will take care of itself” is a famous quote among professional investors. By considering an agent who follows this advice, we reproduce the first and second moments of stock returns, risk-free rate and consumption growth. The agent's behavior toward...

We assess the response of fiscal policy to developments in asset markets in the US. We estimate fiscal policy rules augmented with aggregate wealth, wealth composition (i.e. financial and housing wealth) and asset prices (i.e. stock and housing prices) using two nonlinear specifications that...

In the aftermath of the financial crisis, it has been argued that a guideline for the design of the future policy framework should be to take the ‘a’ out of ‘asymmetry’ in the way monetary policy deals with asset price movements. Recent empirical evidence has suggested that the Federal...

The paper investigates how aging will affect house prices. It uses for the first time a house price dataset covering 22 advanced economies. The analysis finds that demography did and will affect real house prices significantly. The results suggest that a major shift is taking place. In the past...

We study the impact of an anticipated "baby boom" in an overlapping generations economy. The rise of the working population lowers the wage, and the high demand for assets causes a rise in the price of capital which will be reversed when the baby boomers leave the work-force. However, the swings...

We examine the effect of introducing stochastic shocks into a linear rational expectations model with saddlepoint dynamics generated by a forward looking asset price. We derive the fundamental differential equation governing the path of the asset price as a function of the 'sluggish' variable....

Liquidity traps occur when the natural nominal interest rate becomes negative. In a model with capital price dynamics explicitly considered, we find that shocks in the future can cause current and lasting liquidity traps. We propose that the central bank can prevent or fix liquidity traps by...

We explore the impact of mortgage securitization on the international diversification of macroeconomic risk. By making mortgage-related risks internationally tradeable, securitization contributes considerably to better international consumption risk sharing: we find that countries with the most...

In this paper we revisit one of the “missing links” between budget balances and the economic cycle, namely the impact of asset prices on fiscal revenues. We estimate revenue elasticities with respect to equity and real estate price indices for 16 OECD countries, as well as for a synthetic...