This paper surveys the literature on the linkages between asset prices and macroeconomic outcomes. It focuses on three major questions. First, what are the basic theoretical linkages between asset prices and macroeconomic outcomes? Second, what is the empirical evidence supporting these...

We analyze optimal monetary policy when asset prices influence aggregate demand with a lag (as is well documented). In this context, as long as the central bank's main objective is to minimize the output gap, the central bank optimally induces asset price overshooting in response to the...

We develop a model of asset pricing assuming that investor's behavior is habit forming. The model predicts that the effect of consumption growth shocks on the risk premium depends on the business cycle phase of the economy. This empirical implication is tested with a Markov-switching VAR model...

We develop a general equilibrium model based on dynamic agency theory to study investment and asset prices. In our environment, neither firms nor workers can commit to compensation contracts that provide continuation values below their outside options. At the aggregate level, the presence of...

Rare events (RE) and long-run risks (LRR) are complementary approaches for characterizing macroeconomic variables and understanding asset pricing. We estimate a model with RE and LRR using long-term consumption data for 42 economies, identify these two types of risks simultaneously from the...

Fischer Black provided a summary of my 1986 Princeton thesis. The idea in my thesis predates Epstein-Zin (1989). Black wrote:"Greenig (1986) explores time-nonseparable utility as a way of separating risk tolerance from elasticity of intertemporal substitution, and as a way of explaining things...

Evidence suggests that human psychology plays a role in individuals' financial decisions, with economically meaningful consequences observed even at the aggregate market level. This chapter considers many instances whereby human mood induced by exogenous factors is associated with economically...

The Great Financial Crisis of 2007-09 confirmed the vital importance of advancing our understanding of macrofinancial linkages, the two-way interactions between the real economy and the financial sector. The crisis was a bitter reminder of how sharp fluctuations in asset prices, credit and...

We present evidence that the mix of transitory and permanent shocks to consumption is changing over time. We study implications of this finding for asset prices. The uncovered dynamics of consumption implies modestly upward sloping real bond and equity curves, upward sloping nominal yield curve,...