The pricing of capital assets and the interaction of asset prices and real economic activity have been important subjects of macroeconomic research over the past several decades. The role of stock and bond markets in determining consumption demand and investment demand has been emphasized by Keynes and others working in the Keynsian tradition. The new classical macroeconomics also is concerned with the interaction of asset prices and the level of overall economic activity. However, the specific questions addressed and the mechanisms by which the business cycle and asset prices are related are frequently very different from those in the Keynsian tradition. The purpose of this study is to develop a number of general equilibrium models to analyze the effects of changing risk on asset prices, the relationship among asset prices and aggregate savings and investment, and the effects of monetary and fiscal policy. The methodology employed will be based on the new classical macroeconomic paradigm. This research is important because it will shed light on the interaction between asset prices and fluctuations in output and employment. This in turn would provide a deeper understanding of the business cycle how fiscal and monetary policy might be used to ameliorate cyclical instabilities.
