This project addresses a set of related, central questions in macroeconomics. One set of questions involves savings and investment in the world economy. For example, why are national savings and investment rates so highly correlated when there appears to be highly integrated international capital markets? Another set of questions involves the magnitude of equity premium and the variability of asset prices. For example, how does the presence of uncertainty arising from specific shocks to the economy affect the required return on equity and its variability. This research is important because it will provide a better understanding of how monetary and fiscal policy affect savings and investment behavior. These issues are investigated using recently-developed techniques for analyzing equilibria in dynamic, stochastic economies. The emphasis is on obtaining quantitative model predictions, and comparing these predictions with appropriate data. Although the models used are equilibrium models, the analysis is not confined to environments in which equilibrium is Pareto optimal. In fact, an important component of the proposed research is the analysis of economic environments in which there are important constraints on the opportunities of individuals to pool risks via financial markets.
