Essays in macroeconomics: Signal extraction and disaggregation

The first essay of this thesis examines the Permanent-Income Hypothesis, relaxing the assumption that agents immediately discern the duration of any income shock. Instead, permanent-transitory confusion is imposed, allowing agents to revise their estimates of permanent and transitory income shocks in future periods as more information is acquired. A Multi-State Kalman Filter is applied in order to estimate permanent and transitory shocks and the agents' subsequent revisions. It is thus demonstrated that if permanent-transitory confusion is present, traditional measures of excess sensitivity is upwardly biased. In addition, it is shown that studies utilizing the University of Michigan's Panel Study of Income Dynamics yield estimates which are sensitive to the method employed in proxying consumption.;The second essay of this thesis examines the significance of disaggregating interest rates across financial institutions. Historically, interest rates have been recognized as an important variable in macroeconomics. Typically, empirical studies used one interest rate or (interest rate spread) to represent "the" opportunity cost. Yet, it has been shown theoretically that the increasing amount of heterogeneity among financial institutions suggests that it may be incorrect to assume that all institutions change their rates identically in response to a common shock. Different objective functions of profit-seeking commercial banks and non-profit-seeking credit unions indicates that aggregating the two interest rates may result in aggregation bias. The purpose of this essay is to study the implications of these aforementioned issued for the automobile loan market.;Empirical estimation of the automobile loan demand function will be executed using both a fixed coefficient and stochastic coefficient model so as to obtain preliminary evidence of possible aggregation bias. In addition, changes in both the commercial bank interest rate and the credit union interest rate will be regressed upon changes in the Federal Funds rate. This procedure allows a test of the hypothesis that the two interest rates react differently to a common shock. Finally, this essay attempts to explain the variation in the automobile loan demand function by appealing to changes in the ratio of interest rates at commercial banks and credit unions.