The rational expectations (RE) hypothesis although elegant and useful requires demanding assumptions on part of the agent. A key outcome of the RE hypothesis is that beliefs disappear as an independent force in the model. A branch of the literature focuses on relaxations of the RE hypothesis to allow agents to instead learn the data-generating process (DGP) over time. With adaptive learning, beliefs re-emerge as a key element that influences the DGP. I argue that this relaxation is important for asset pricing settings, which are complex environments where individual beliefs play a key role in decision making. My dissertation will explore instances where learning can improve our understanding of asset pricing.

Chapter 1 presents a simple asset pricing model with endogenous participation that can match key volatility moments when agents adaptively learn about both the risk and the return of stocks. With learning about risk, excess volatility of prices is driven by fluctuations in the participation rate that arise because agents' risk estimates vary with prices. I find that learning about risk is quantitatively more important than learning about returns. A calibrated model can jointly match the mean participation rate, the volatility of participation rates, and explain 25% of the excess volatility of stock prices observed in U.S. data.

Chapter 2 presents a simplified version of the model in Chapter 1 and tests the model in a laboratory setting. Recent evidence suggests subjective returns play a key role in stock market participation. Furthermore, there is strong evidence that stock market experiences, i.e. realized returns, impact subjective returns. I bring a model into the laboratory and find that learning-driven subjective returns can explain limited participation. Stock market participation is increasing in both subjective returns and past realized returns. I find direct evidence that "learning from experience" generates heterogeneity in subjective returns, where subjects who experience low returns have lower subjective returns than subjects who experience high returns. In particular, subjects over-weigh price trends when they experience high returns and under-weigh it when they experience low returns.

Chapter 3 presents an asset pricing model where agents test the specification of their models, while adaptively updating the parameters and find that restricted-perceptions equilibria (RPE) naturally arise. I extend upon recently developed model specification techniques to a multi-agent framework. Multiple agents are endowed with different models which they update and test the specification in real time. When a model is rejected, agents draw a new model from a distribution. I find that the rational expectations equilibrium (REE) is not locally stable with respect to hypothesis testing under reasonable parameterization. With constant-gain learning, the model spends most of its time in a subset of the RPE and in particular, the dominant model used is not the fully-specified model, but a misspecified one.

This dissertation contains three chapters on impact and conduct of macroeconomic policy. Together the three chapters of this dissertation address important and timely issues in macroeconomic policy. Chapter 1 explores a new channel of short run transmission of fiscal policy under constraints of a monetary union. Chapter 2 looks into how unconventional monetary policy measures transmit to household consumption. In Chapter 3 I pivot from the impact of macroeconomic policy and look at the issue of credibility concerning the monetary policymakers in the US. In Chapter 1, I argue that fiscal policy is highly effective at stimulating output in countries via its impact on consumer sentiments. Using data for the European Economic and Monetary union, I provide evidence that the sentiments channel for fiscal policy is strongly present in peripheral European countries but absent in core countries. The impact of fiscal policy on consumer sentiments also make fiscal consolidation more costly in terms of output in peripheral countries. I validate my empirical findings using a New Keynesian model of currency union where agents form expectations based on non-fundamental factors (animal spirits) correlated with fiscal policy. I show the existence of a stronger response of output to fiscal policy through the latter's impact on consumer sentiments. Until recently, the effect of policy on confidence and expectations have largely only been discussed theoretically. However, surveys conducted by central banks and other academic organizations have allowed us to quantify what Keynes described as "animal spirits". The availability of empirical measures of sentiments gives us an opportunity to measure whether sentiments can transmit into real economic activity, and how macroeconomic policy can influence it. The contribution of this paper is to understand the role played by consumer sentiments, measured using the survey conducted by European Commission, in transmitting fiscal policy to the real economy. I study this question in the context of a currency union where the constraints on monetary policy allows fiscal policy to have a stronger influence within individual economies of the union. This paper provides empirical evidence on the role played by home mortgages in transmission of unconventional monetary policy. Using household level panel data on consumption, I show that the ability of households to refinance their mortgages and extract home equity, determines the efficacy of monetary policy in stimulating consumption. Homeowners who refinance their loan in response to an expansionary monetary policy shock consume more than other households. This heterogeneity is conditioned by local home prices. I find that mortgage owners who refinance their loan in states with higher house prices have higher consumption growth following an expansionary shock.

In Chapter 2, I look at the transmission of unconventional monetary policy shocks (Forward Guidance and Large Scale Asset Purchases) on household consumption. It has been well documented that monetary policy can have heterogeneous effect on households balance sheet. An expansionary policy can reduce inequality in the economy by reducing the real debt burden of borrowers. These facts have been established for conventional monetary policy where the central bank changes the policy rate. However, in the post 2008 world where policy rates in most countries hit the zero lower bounds, the importance of unconventional monetary policy gained cognizance. This paper attempts to document the impact of unconventional policy measures on household consumption. I specifically focus on the heterogeneous transmission of these policy on household consumption via the mortgage market. Using the consumer expenditure survey data, I find evidence that the channels of transmission of LSAP shock, in particular, vary across households depending on their decision to refinance their existing mortgages. An expansionary monetary policy lowers mortgage rates and allows homeowners to extract home equity via refinancing, resulting in higher disposable income. Higher disposable income converts into higher consumption for debt constrained households relative to homeowners who do not refinance, and households who do not own a house.

Chapter 3 looks at the market returns of investments by Federal Reserve board members to test whether Fed officials take advantage of superior information on interest rate paths to opportunely time their personal investments. Credibility in central banking institutions is key to effectiveness of monetary policy. However, the recent allegations have raised questions on well timed and large volume trades by some senior Fed officials in past couple of years. These allegations have also invited tighter regulations by the Federal Reserve on trades by officials. On average, we find no significant evidence of abnormal returns on trades by FOMC members compared to the average market. However, tighter restrictions and more transparent disclosures by Fed officials can help strengthen the credibility of the institution.

The first chapter of my thesis explores monetary policy in a New Keynesian model with Markov-switching risk aversion. The second considers the implications for the macroeconomic and financial properties of an RBC model of the presence of habit formation. The third examines the result of adding the ``Tobin constraint" that shares equal the capital stock to a benchmark RBC mdoel. The underlying theme of these endeavors is rendering macroeconomic models more realistic via the introduction of time-varying preferences, non-linear modelling, and financial frictions.

This dissertation comprises three chapters. Chapter 1 is based on my unpublished second-year paper "Estimation Methods of Adaptive Learning" In this chapter, I investigate the differences inherent in estimating New Keynesian models via the linearity assumptions of the Kalman filter and the more plausible Particle filter. As the computational abilities of econometricians continue to expand, the use of Nonlinear state space methods becomes a more viable methodology to capture realities and understand macroeconomic policy events. However, research on the empirical differences of new Keynesian models equipped with adaptive learning is limited. To fill this gap, I use U.S. macroeconomic data to estimate both a Kalman filter that incorporates a new Keynesian model via expectations formed via recursive least squares and compare this with a particle filter estimation procedure. I pay particular attention to the constant gain learning parameter along with the empirical likelihood, in order to understand which model is more realistic & why. My findings show that in the absence of a particle filter, overall SSE is 45\% greater, and a correspondingly higher likelihood. Additionally, I find the constant gain learning parameter in the standard 3 equation new-Keynesian model to be 16% higher under Particle filter estimation as opposed to the less plausible Kalman filter estimation. Chapter 2 is motivated by the recent monetary policy actions prompted by the federal reserve in response to Covid-19, In this chapter, I introduce a structural new Keynesian model with household wealth-in-utility and capital adjustment costs in the production process of intermediary firms. Using these features in the economic process, I additionally incorporate households and investors to form expectations about the future state of the economy via adaptive learning. To address the increasingly prevalent zero lower-bound central bankers face when making interest and balance sheet decisions, I enable households and firms to update their beliefs about the economy via Recursive least squares, while also allowing them to simultaneously learn the alternate equilibrium in which the federal funds rate reaches the floor of 0\% with an updated counting rule. Equipped with the following model of the economic process, I utilize U.S. financial

The Maryland Route 30 Bypass at Hampstead, Carroll County, Maryland is a long awaited 4.5 mile $27 million safety and congestion relief project proposed by the Maryland State Highway Administration (MD SHA). However, an unanticipated problem arose during the final stages of design and prior to the submittal of state and federal environmental permits. Late in 1997, the northern population of a small turtle (Clemmys muhlenbergi), the bog turtle, was listed as a threatened species under the Endangered Species Act. The rural residential and agricultural lands surrounding Hampstead provide essential habitat for this rare turtle. While many saw this as potential threat to the project, others saw this as an opportunity for a creative approach for habitat and species protection.

Heterogeneous agents models have become the norm in modern macroeconomics as the limitations of the representative-agent paradigm and the importance of studying household heterogeneity grow in recognition. Agent heterogeneity may not only be important to accurately capture the description of an aggregate equilibrium. Also, the representative agent assumption may hide many distributional effects and therefore could change the answer to many normative questions usually given by representative agent models.

This dissertation contains three chapters exemplifying ways in which the consideration of heterogeneous agents in the modelling of macroeconomic phenomena has important repercussions for the predictions of the model and its normative implications. Chapters 1 and 2 show the importance of accounting for worker heterogeneity in the analysis of labor markets. Chapter 1 presents a search and matching model of unemployment with heterogeneous workers which’s main features, are ex-ante worker heterogeneity and undirected search. These features enable the model to replicate the empirical correlations between labor market outcomes and proxy variables for worker productivity. The model displays job rationing, which makes it useful to understand the high levels of unemployment observed in deep recessions. It also constitutes a versatile tool for the analysis of several labor-market aspects in which worker heterogeneity could play an important role, such as the impact of employment policies that are believed to have asymmetric effects across the labor force.

Chapter 2 provides an example of such applications by analyzing the effects of increments of a minimum wage. It explores theoretically and empirically the notion that minimum wages affect low-skill workers asymmetrically due to productivity differences. Using the model presented in chapter 1, with the incorporation of endogenous search intensity to account for the effects that minimum wages could have on worker participation, I show that a rising minimum wage lowers the employment and labor force participation of low-productivity workers by pricing them out of the market, while it increases the employment, participation, and wages of more productive workers that remain hirable. Chapter 2 also contains an empirical analysis that investigates and ultimately validates the model’s predictions of changes in the minimum wage. Within the labor market for low-education (high school or lower) workers, increments in the minimum wage have diametrically opposed effects: they reduce the employment and labor force participation of teenagers with less than high school education, while increasing the employment and labor force participation of mature workers with high school educational attainment. A calibrated version of the model targeting the low-education labor market shows that, despite its opposite effects across the labor force, an increase in the minimum wage negatively impacts aggregate employment, labor force participation, and social welfare.

Chapter 3 investigates the existence of complex dynamics in the behavior of exchange rates due heterogeneity in the expectations of their future value. A simple model of exchange rate dynamics featuring traders with heterogeneous expectations is introduced. The model is based on the asset pricing model in Brock and Hommes (1998) and features the BNN dynamic presented in Brown et al. (1950), a dynamic with desirable properties absent in other dynamics used in the literature. The chapter shows that even this simple model can easily generate complex and even chaotic dynamics in the exchange rate because of the interaction of traders with different beliefs. An important implication is that long-term exchange rate prediction is, in theory, difficult.

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