Essays in Macroeconomics and Finance

This dissertation contains three essays in macroeconomics and finance. Chapter 1 estimates the relative importance of agents receiving advance information or having distorted beliefs about future fundamentals in explaining a set of macroeconomic and financial data. Chapter 2 proposes a new measure of time-varying aggregate uncertainty, which is based on information from a large panel of macroeconomic and financial time series. Chapter 3 explores how imposing risk constraints on financial intermediaries in a continuous-time heterogeneous-agent economy can affect equilibrium allocations and asset price dynamics. Fluctuations in the beliefs of economic agents can be driven by current fundamentals, advance information about future fundamentals, or distortions resulting from informational or psychological limitations. Chapter 1 presents a dynamic stochastic general equilibrium (DSGE) model that jointly considers all three possibilities and estimates their relative importance for explaining macroeconomic and financial data. In the model, agents' beliefs are based on a subjective probability measure that can be stochastically distorted relative to the objective measure. By directly parameterizing the Radon-Nikodým process linking these two measures, it is possible to solve the model under the subjective measure and change back to the objective measure for estimation. To help the model jointly explain macroeconomic and financial data, it features recursive preferences alongside a number of more standard business-cycle frictions. To facilitate estimation, a solution method is presented that allows risk premia to affect the model's linear-approximate dynamics. To discipline the estimates, direct data on subjective forecasts is included in the set of observable variables. Results indicate that both advance information and distorted beliefs are important. On average about two-thirds of the fluctuations in endogenous variables can be attributed to these two sources. While they are equally important for explaining output and employment, advance information is most important for explaining inflation and investment, and distorted beliefs are most important for explaining stock returns and consumption. Chapter 2 exploits a data rich environment to provide direct econometric estimates of time-varying macroeconomic uncertainty. The estimates display significant independent variations from popular uncertainty proxies, suggesting that much of the variation in the proxies is not driven by uncertainty. Quantitatively important uncertainty episodes appear far more infrequently than indicated by popular uncertainty proxies, but when they do occur, they are larger, more persistent, and more correlated with real activity. The estimates provide a benchmark to evaluate theories for which uncertainty shocks play a role in business cycles. Finally, Chapter 3 studies the general equilibrium effects of introducing a Value-at-Risk (VaR) constraint into a dynamic continuous-time economy with homogeneous preferences, inefficient endogenous volatility, fire sales, and economically valuable financial intermediation. The main finding is that through its impact on the stationary distribution of wealth in the economy, a VaR constraint can reduce the average level of endogenous volatility and lower the probability of entering a crisis regime. It does so by forcing agents to sell off their risky asset holdings earlier than they otherwise would, while they still have a large equity buffer to absorb losses. This chapter is the first study to explore the effects of a VaR constraint in a model that does not feature any heterogeneity in preferences or beliefs, and in which endogenous volatility and crises are socially inefficient