Doctor of Philosophy, The Ohio State University, 2012, Economics

Rational inattention is an imperfect information mechanism that captures the fact that people are constrained in their ability to process information, and asserts that the imperfect ability to process information is the ultimate reason for imperfect learning. It features the optimal allocation of the scarce attention resource and the endogenous nature of information. My research focuses on the theoretical implications and empirical relevance of rational inattention for price dynamics in an environment with volatility uncertainty, and the implications on monetary policy. The first chapter, "Rational Inattention in Uncertain Business Cycles," explores the impact of uncertainty shocks on price dynamics when there are information frictions resulting from limited information processing capability. The model shows that changes in shock volatility translate into changes in firms' response in levels through the endogenous role of information. Firms optimally adjust their information choice when a volatility shock occurs, and their pricing behavior changes accordingly. The paper proposes endogenous information choice as another channel through which volatility uncertainty affects economic activity. According to the model, 1) firms' learning and optimal attention exhibits inertia and asymmetry in response to volatility changes; 2) firms choose to process more information when uncertainty increases, especially about aggregate conditions; 3) responses to shocks are more sensitive as firms rationally choose to increase their information processing capability when perceived volatility increases. The paper sheds light on such issues as why monetary policy has time-dependent effects, whether and when to make policy changes and public announcements, and why economic agents' sentiments, the so-called "animal spirits," have real effects. The chapter also provides empirical support for my model by using regime-dependent factor-augmented vector autoregression (FAVAR) analysis. I use FAV (open full item for complete abstract)

Committee: Paul Evans (Advisor); William Dupor (Committee Member); Pok-Sang Lam (Committee Member) Subjects: Economics

Doctor of Philosophy, The Ohio State University, 2011, Economics

A considerable portion of the asset pricing literature considers the demand schedule for asset prices to be perfectly elastic (flat). As argued, asset prices are determined using information about future payoff distribution, as well as the discount rate; consequently, an asset would be priced independent of its available supply. Furthermore, such a flat demand curve is considered to be a consequence of the Efficient Market Hypothesis. My dissertation evaluates and questions the factuality of these assertions. I approach this problem from both an empirical and a theoretical perspective. The general argument is that asset prices do respond to supply-shocks; and changes in aggregate demand, stemming from preference changes, new international investments, or quantitative easing by the Fed, can result in price changes. Hence, asset prices are determined by both demand and supply factors. In the first essay, “Downward Sloping Asset Demand: Evidence from the Treasury Bills Market,” I report on my empirical study which establishes the existence of a downward sloping demand curve (DSDC) in the T-bill market. In the second essay, “Asset Pricing: Inelastic Supply,” I examine the theoretical issues concerning a downward sloping demand curve. I begin by clarifying a common confusion in the literature, namely, that many asset pricing models imply a flat demand curve. I show that the prominent asset pricing models, including Capital Asset Pricing Model (CAPM), Arbitrage Pricing Theory (APT) and Consumption Capital Asset Pricing Model (CCAPM), all have an underlying DSDC. I further show that, while these models imply the relevance of supply, they are inconvenient as a vehicle for the estimation and analysis of the DSDC in the data. For those purposes, I develop an asset pricing framework based on the stochastic discount factor framework, specifically designed with a DSDC at its heart. I end the essay with a discussion of the framework's implications and applications. In the third (open full item for complete abstract)

Committee: Pok-sang Lam (Advisor); Paul Evans (Committee Member); J. Huston McCulloch (Committee Member) Subjects: Economics