We propose a tractable model of bargaining with optimism. The distinguishing feature of our model is that the bargaining power is durable and changes only due to important events such as elections. Players know their current bargaining powers, but they can be optimistic that events will shift...

Financial innovations in recent decades have vastly expanded investors' portfolio choice. We theoretically analyze the effect of these developments on investors' savings and asset returns. In our model, investors with possibly heterogeneous beliefs choose their savings portfolios. Under mild...

This paper proposes a welfare criterion for economies in which agents have heterogeneously distorted beliefs. Instead of taking a stand on whose belief is correct, our criterion asserts that an allocation is belief-neutral efficient (inefficient) if it is efficient (inefficient) under any convex...

We present a model of investment hangover motivated by the Great Recession. In our model, overbuilding of residential capital requires a reallocation of productive resources to nonresidential sectors, which is facilitated by a reduction in the real interest rate. If the fall in the interest rate...

We investigate the role of macroprudential policies in mitigating liquidity traps driven by deleveraging, using a simple Keynesian model. When constrained agents engage in deleveraging, the interest rate needs to fall to induce unconstrained agents to pick up the decline in aggregate demand....

We present a model of investment hangover motivated by the Great Recession. In our model, overbuilding of residential capital requires a reallocation of productive resources to nonresidential sectors, which is facilitated by a reduction in the real interest rate. If the fall in the interest...

We present a model of investment hangover motivated by the Great Recession. In our model, overbuilding of residential capital requires a reallocation of productive resources to nonresidential sectors, which is facilitated by a reduction in the real interest rate. If the fall in the interest rate...

While the traditional view of financial innovation emphasizes the risk sharing role of new financial assets, belief disagreements about these assets naturally lead to speculation, which represents a powerful economic force in the opposite direction. This paper investigates the effect of...

Financial assets provide return and liquidity services to their holders. However, during severe financial crises many asset prices plummet, destroying their liquidity provision function at the worst possible time. In this paper we present a model of fire sales and market breakdowns, and of the...