Stochastic models with economy-wide shocks imply that the welfare costs of aggregate volatility are negligible. In reality idiosyncratic shocks are important, and empirical evidence suggests that their volatility is several times that of aggregate shocks. This paper introduces both types of...

This paper presents a two-country dynamic perfect foresight Ricardian model with wealth effects to study the relationship between government spending financed by alternative taxation, the terms of trade and welfare. An increase in domestic government spending financed by a distortionary capital...

The international transmission of tax shocks are analyzed in a two-country infinite-horizon representative agent framework. The viability of the tax regimes, arising from the arbitrage conditions characterizing equilibrium in a perfect world capital market, is emphasized. Conditions for both...

We ask whether ex-post inefficiencies consistent with ex-ante efficiency in consumption and labor allocations are compatible with substantive movements in asset allocation. The answer we obtain depends crucially on the market regime relative to unemployment insurance. If there are complete...

Stochastic models with economy-wide shocks imply that the welfare costs of aggregate volatility are negligible and contribute little to explaining the equity premium puzzle. Motivated by this failure, this paper introduces idiosyncratic shocks. Drawing on empirical evidence suggesting that the...