This dissertation is composed of three essays, which revolve around developing DSGE models to understand the fluctuations in business cycles, mainly in terms of volatility and comovement.

Chapter 1 titled "Land Price and Asset Pricing Puzzles" presents a production-based general equilibrium asset pricing model with land. I show that this model can explain key financial markets phenomena of a lower-than-unity intertemporal elasticity of substitution (IES), which is proven to be a challenge in the long-run risks literature. The success of the model comes from the competition for land between household and firm, which raises the land price and further implies high and volatile land return. Consequently, the model solves the equity premium puzzle and volatility puzzle. Moreover,...[ Read more ]

This dissertation is composed of three essays, which revolve around developing DSGE models to understand the fluctuations in business cycles, mainly in terms of volatility and comovement.

Chapter 1 titled "Land Price and Asset Pricing Puzzles" presents a production-based general equilibrium asset pricing model with land. I show that this model can explain key financial markets phenomena of a lower-than-unity intertemporal elasticity of substitution (IES), which is proven to be a challenge in the long-run risks literature. The success of the model comes from the competition for land between household and firm, which raises the land price and further implies high and volatile land return. Consequently, the model solves the equity premium puzzle and volatility puzzle. Moreover, the model can explain that volatility risk in productivity growth carries a positive risk premium; and the model can also be extended to generate cross-sectional differences in firms' returns. In addition to the success in financial markets, I show that the model captures the salient business cycle properties, such as the relative volatility and comovement among land price, consumption and investment. All the results are robust with a greater-than-unity IES.

Chapter 2 titled "Household and Business Investment Dynamics in a Demand Rigidity RBC Model" builds a stochastic model with demand rigidity to explain the dynamics of business investment and household investment in the U.S. macroeconomic data. In contrast to the standard RBC model, my benchmark model generates the positive comovement with GDP and the correct lead-lag pattern between two kinds of investment, which are long standing puzzles in the existing literature. Demand rigidity, characterized by firm entry-and-exit, could play a role in reducing the demand for business investment goods. It dampens the crowding-out effect between two types of investment in the standard RBC setting and hence generates the data-consistent patterns. This paper further investigates an alternative framework to check the robustness of the role of demand rigidity, and also applies the baseline model to replicate the cross-country differences in lead-lag patterns.

Chapter 3 titled "Comovement and Multiple-Product Firms" introduces a general equilibrium model of multiple-product firms, which can help to solve the comovement puzzle usually associated with news shock. Although empirical evidences have shown that multiple-product firms dominate worldwide output and trade, they have received relatively little theoretical attention, especially in the strands of business cycle literature. I show that a highly stylized model with the structure of multiple-product firms can restore the comovements among investment, consumption, employment, number of firms and output, because in this framework consumption and investment become productive complementarity even they are substitutes for consumers. I also apply the multiple-product model to respond to other prevailing shocks such as uncertainty shock and investment shock which encounter difficulty in generating business-cycle comovement, and find the robust result.