This dissertation consists of three essays that explore the interaction between various discount rates and the macroeconomy.
The first essay studies the cross-section of discount rates, specifically, the term structure of interest rates. When physical capital is discounted like a bond with a similar duration, a high term spread is associated with low average duration for investment. I document a strong negative correlation between the term spread and the duration of investment, implying an important role for the cost of capital in determining the composition of aggregate investment. The results are robust to including a variety of controls. Consumer durable goods purchases display similar behavior.
The second essay develops a new utility specification that incorporates Campbell-Cochrane-type habits into the Epstein-Zin class of preferences. It is a model in which risk premia change over time. In a simple calibration of a real business cycle model with EZ-habit preferences, the model generates a strongly countercyclical equity premium, substantial equity return predictability, and a stable riskless interest rate, as in the data. Moreover, conditional on the average level of risk aversion, time-variation in risk aversion increases the volatility and mean return of equities. On the real side, the model matches the short and long-term variances of output, consumption, and investment growth. As an additional empirical test, I measure implied risk aversion and find that it has an R2 of over 50 percent for 5-year stock returns in post-war data.
The third essay develops a New-Keynesian model in which households have Epstein-Zin preferences with time-varying risk aversion and the central bank has a time-varying inflation target. The model matches the dynamics of nominal bond prices in the US economy well: the fitting errors for individual bond yields are roughly as large as those obtained from a non-structural three-factor model, and two thirds smaller than in models with constant risk aversion or a constant inflation target.
|Advisor:||Campbell, John Y.|
|Commitee:||Benmelech, Efraim, Farhi, Emmanuel|
|School Location:||United States -- Massachusetts|
|Source:||DAI-A 73/11(E), Dissertation Abstracts International|
|Keywords:||Asset pricing, Business cycles, Discount rates, Investment, Risk premia, Time-varying|
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