FRICTIONS IN ASSET PRICING AND MACROECONOMICS

This paper is about a useful way of taking account of frictions in ass et pricing and macroeconomics. I start by noting that complete frictio nless markets models have a number of empirical dericiencies. Then I s uggest an alternative class of models with incomplete markets and hete rogeneous agents which can also accommodate a variety of other frictio ns. These models are quantitatively attractive and computationally fea sible and have the potential to overcome many or all of the empirical deficiencies of complete frictionless markets models. The incomplete m arkets model can also differ significantly from the complete frictionl ess markets model on some important policy questions.