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Working Paper
Beliefs, Aggregate Risk, and the U.S. Housing Boom
Endogenously optimistic beliefs about future house prices can account for the increase, time-path, and volatility of house prices in the U.S. housing boom of the 2000s without shocks to housing preferences. In a general equilibrium model with incomplete markets and aggregate risk, heterogeneous agents endogenously form beliefs about future house prices in response to shocks to fundamentals. When fundamentals like credit conditions loosen, agents can only partially revise up their beliefs, resulting in increasingly optimistic beliefs that are consistent with both novel and existing empirical ...
Working Paper
Incomplete Information and Irreversible Investment
How do information frictions and investment frictions interact? We use a continuous-time model to analytically characterize how incomplete information distorts firms’ decision rules and stationary distribution when investment is irreversible. The two frictions interact in rich and substantial ways. At the firm level, noisier information shrinks a firm’s inaction region and reduces the elasticity of investment to productivity. In the aggregate, incomplete information increases steady-state capital, exacerbates capital misallocation, and mitigates the impact of productivity shocks on ...