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Essays in Macroeconomics and Asset Pricing



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Lu, Jason 


The dissertation presents three essays on asset pricing in the context of Macroeconomics. Each chapter develops upon a central theme: that asset price bubbles act to drive fluctuations in the aggregate economy and conversely are themselves a symptom of economic conditions. The dissertation presents arguments and evidence in support of this theme. The implication is that these types of asset price fluctuations are important to study if we wish to develop a full understanding of the macroeconomy as a larger integrated system.

In my first chapter, I study the effects of bubbles on a secular stagnation economy. In such a setting, a negative natural rate of interest drives a deficit of demand and a persistent output gap. I find that bubbles act to increase the natural rate of interest, hence they alleviate the cause of secular stagnation. This suggests a positive role for bubbles, however bubbles are intrinsically unstable. Larger bubbles are shown to be more unstable, and upon collapse the natural rate of interest falls, potentially triggering secular stagnation.

In the second chapter, I offer a demographic explanation to the secular decline in interest rates. Fertility rates fell dramatically in the early 1970s, which created a distortion in the age distribution with the cohort born just before the fertility fall being disproportionately larger than the cohorts born both before and after. As this large cohort accumulates assets for retirement, their savings flood the capital market leading to a collapse in interest rates. The model offers an explanation for the fall in interest rates over the last three decades. Furthermore, it predicts that real interest rates will continue to fall until hitting a trough around the year 2035. Despite the fall in interest rates, the model does not provide a rationale for the rise in land prices. This chapter is a co-authored work with Coen Teulings.

In the final chapter, I develop a model for house price dynamics driven by short and long-term shocks to housing fundamentals. I consider households who have incomplete information and cannot directly observe underlying changes in fundamentals. Instead, they solve a Bayesian signal extraction problem to infer fundamentals from prices. In contrast to the complete information benchmark, my model replicates the observed empirical short-term momentum and long-term reversal in prices, which are often associated with speculation in housing markets. Furthermore, I show that a sequence of positive short term shocks generates an expectations-driven boom and bust in housing that is of far greater magnitude than in the complete information benchmark. Finally, I demonstrate an application of my model to identify episodes of bubbles in US house price data.





Brendon, Charles


macroeconomics, housing, bubbles


Doctor of Philosophy (PhD)

Awarding Institution

University of Cambridge
ESRC (1511564)