We analyze optimal monetary policy and its implications for asset prices, when aggregate demand has inertia and responds to asset prices with a lag. If there is a negative output gap, the central bank optimally overshoots aggregate asset prices (asset prices are initially pushed above their...

This thesis consists of four essays about "uncertainty" and how markets deal with it. Uncertainty is about subjective beliefs, and thus it often comes with heterogeneous beliefs that may be present temporarily or even forever. The first essay analyzes the effect of uncertainty, and the...

"During extreme financial crises, all of a sudden, the financial world that was once rife with profit opportunities for financial institutions (banks, for short), becomes exceedingly complex. Confusion and uncertainty follow, ravaging financial markets and triggering massive flight-to-quality...