Macroeconomics With Frictions

This article is a progress report on research that attempts to include one type of market incompleteness and frictions in macroeconomic models. The focus of the research is the absence of insurance markets in which individual-specific risks may be insured against. The article describes some areas where this type of research has been and promises to be particularly useful, including consumption and saving, wealth distribution, asset markets, business cycles, and fiscal policies. The article also describes work in each of these areas that was presented at a conference sponsored by the Federal Reserve Bank of Minneapolis in the fall of 1993. The views expressed herein are those of the author and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. The dominant modeling approach in macroeconomics so far has been to assume that markets in an economy are complete and frictionless. Economists using this approach have assumed, in other words, that in the economy they are studying, markets exist for all possible trades that any