Asset Pricing with Incomplete Markets and Heterogeneous Agents

This paper is divided into two chapters. The first chapter serves as a technical introduction, and it presents a detailed comparison between local and global methods of solving systems of non-linear expectational difference equations which do not have analytical solutions. This is illustrated with a simple and standard model of the real business cycle. Against this backdrop, in the second chapter, I expand upon a classical Krusell and Smith model by introducing a welfare maximizing government that follows a discretionary fiscal policy. To the best of my knowledge, this is the first attempt at incorporating such a problem into this setup. On the one hand, a proposed original way of dealing with a consequent new technical complication may serve as a starting point for further research in this area, and on the other hand, the result highlights the difficulty in replicating a fat tail in wealth distribution and a high equity premium.