Carlos E. Zarazaga


This dissertation investigates several key macroeconomic and asset pricing topics, with a particular interest in exploring the underlying driving forces of business cycles and asset market fluctuations. The dissertation includes three chapters, with the first two chapters solo-authored by me and the third chapter co-authored with Dr. Carlos Zarazaga.

The first chapter develops a dynamic and stochastic general equilibrium model, and exploits Bayesian inference methods to investigate the major sources of fluctuations in aggregate variables and asset prices. Taking into account the possibility that the growth of total factor productivity, labor-augmenting technology and investment-specific technology might consist of permanent and transitory components, I consider a baseline along with three alternative specifications on the structure of the exogenous processes. It is found that the identification of the major sources of aggregate fluctuations hinges critically upon researchers' assumptions on the exogenous processes. Bayesian model comparison indicates that previous studies might have overlooked the persistent change in investment-specific technology growth, and thus, underestimate its importance to driving the business cycles. Using the structure of the exogenous processes that is mostly favored by the data, I find that investment-specific technology shocks contribute a significantly large fraction of the short-run and the long-run fluctuations in output growth, investment growth, and the share of total market values in output. In addition, the long-run predicted error variance of consumption-output ratio and hours is overwhelmingly due to shocks to the permanent and the transitory components of investment-specific technology. In contrast, labor augmenting technology shocks, preference shocks and government spending shocks are only important contributors to fluctuations in hours, consumption and government expenditures, respectively, in the very short-run.

The second chapter proposes a macro-based asset pricing model, and seeks to identify the macroeconomic driving forces of asset price movements. The long-run risks literature highlights the importance of the predictable long-run component in consumption growth to explaining the asset pricing facts, but might overlook other potential determinants that are not consumption-related. So as to understand the asset market phenomena from a wider perspective, I develop a consumption-based asset pricing model with recursive preferences, accommodating both the long-run consumption growth and the time-preference shock channels. In the modeled economy, asset market fluctuates in response to long-run consumption growth, time-preference shocks and their respective conditional volatilities; and the expected equity premium reflects the market compensation for households' exposure to consumption growth uncertainty and valuation risks. Empirical evidence, based on the moment-matching methods and the particle smoothing algorithm, indicates that, first, the proposed model is able to replicate the joint dynamics of the key asset market variables. Second, compared with the standard long-run risks model, the proposed framework achieves remarkable improvement along the dimension of resolving the major asset pricing puzzles. In addition, it is found that long-run consumption growth is the major contributor to asset market fluctuations, whereas time-preference shocks and valuation risks are non-negligible determinants of the risk-free rate.

The third chapter develops a novel methodology for systematic assessment of the credibility of fiscal stabilization programs. The credibility of fiscal stabilization programs plays a critical role in their macroeconomic outcomes, yet formal assessments of that credibility are typically missing from analyses of the economic consequences and effectiveness of those programs. Therefore, we remedy that omission for the most recent consolidation attempt in the U.S.: the 2011-mandated budget sequestration spending cuts in discretionary spending slated to begin in 2013. The proposed methodology draws its elements from the "event-study" and the Business Cycle Accounting traditions. It is found that the fiscal austerity program had little, if any, credibility during the relevant 2012 - 2013 event-study window. A major implication of our findings is that the policy recommendations suggested by the observed outcomes of fiscal stabilization programs might be misleading, absent consideration of the extent to which they were perceived as sustainable.

Degree Date

Spring 5-19-2018

Document Type





Dr. Nathan Balke

Second Advisor

Dr. Thomas Fomby

Third Advisor

Dr. Ömer Özak

Subject Categories


Creative Commons License

Creative Commons Attribution-Noncommercial 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial 4.0 License

Ruiyang Hu_Deposit Agreement.pdf (73 kB)
Deposit Agreement