| Summary: | This thesis is composed of three chapters. The first chapter argues that boom-bust behavior in asset prices can be explained by a model in which boundedly-rational agents learn the process for prices. The key feature of the model is that learning operates in both the demand for assets and the supply of credit. Interactions between agents on either side of the market create complementarities in their respective beliefs, providing an additional source of propagation. In contrast, the chapter shows why learning involving only one side on the market, the focus of most of the literature, cannot plausibly explain persistent and large price booms. Quantitatively, the model explains recent experiences in US housing markets. The full appreciation in US house prices in the 2000s can be generated from observed mortgage rate changes. The model also generates endogenous liberalizations in household lending conditions during price booms and replicates key volatilities of housing market variables at business cycle frequencies.
The second chapter presents a learning model in which households are endowed with recursive preferences. The chapter evaluates how the introduction of bounded rationality in beliefs effects the level of long run consumption risk in the economy. The chapter shows that structural learning frameworks currently found in the literature lead to a perception of low persistence in exogenous shocks, regardless of the underlying stochastic processes in the economy. Generating long run risk requires a preference for late resolution of uncertainty.
The third chapter provides an explanation for two features of the world saving distribution: (i) saving rates are significantly different across countries and they remain different for long periods of time; and (ii) some countries and regions have shown very sharp changes in their average saving rates over short periods of time. It formalizes a model of the world economy comprised of open economies inhabited by heterogeneous agents endowed with recursive preferences. The model can generate the time series behavior of saving observed in the data from measured productivity shocks. The model can also generate the sudden and long-lived increase in East Asian savings by incorporating shocks to societal aspiration. === Arts, Faculty of === Vancouver School of Economics === Graduate
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