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In this work we consider the explanations for the rejection of the Rational Expectations-Life Cycle permanent Income Hypothesis (RE-LCPI Hypothesis), based on the finding of the "excess sensitivity" of consumption to current income. The excess sensitivity finding is well established for both time series and cross sectional data, however, the reasons for excess sensitivity are less well established. A prominent explanation for the observed excess sensitivity of consumption to income, is that capital market imperfections will prevent the consumer from borrowing and hence prevent the consumer from realising her desired consumption expenditure path (liquidity constraints). Competing explanations of excess sensitivity include myopia and precautionary savings' motives. Although some studies have cited particular reasons for the rejection of the RE-LCPI hypothesis, few studies have attempted to discriminate between the alternative explanations. This dissertation proposes to identify and discriminate between these alternative explanations using the Nordic countries (Finland, Norway and Sweden). The thesis is structured into four key chapters. Chapter Two identifies if consumption for Finland, Norway, and Sweden is excessively sensitive to changes in income, that is, is excess sensitivity evident for these countries. From the evidence of excess sensitivity found in chapter two, Chapter Three attempts to discriminate between two alternative explanations for excess sensitivity - myopia and liquidity constraints. Chapter Four draws on material in chapter three, and extends it in a new direction. From evidence of asymmetries in Chapter Three, this chapter attempts to analyse the source of the asymmetry, in particular, it examines if the asymmetry can be accredited to liquidity constraints or not. While Chapters Three and Four attempt to discriminate between alternative potential explanations for the excess sensitivity of consumption to income changes, by seeking to identify asymmetric behaviour of a kind consistent with optimising behaviour in the presence of liquidity constraints or in the absence of asymmetry as would be consistent with myopia, Chapter Five examines an alternative explanation: the potential mis-specification arising from the assumption of certainty equivalent. Specifically the potential role of uncertainty about future income in generating precautionary savings is examined within a two group aggregate consumption function.

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This thesis is composed of three chapters. In the first chapter, I show that capital reallocation is highly procyclical, in contrast to the prediction of existing businesscycle models with firm heterogeneity, where it is highly countercyclical. I argue that endogenizing the price of used capital relative to new solves this puzzle. First I show empirically that in several sectors the price of used investment goods relative to new is procyclical. Then I build a dynamic general equilibrium model with heterogeneous firms facing both aggregate and idiosyncratic productivity shocks. Used capital is an imperfect substitute for new capital because of firm-level capital specificity. In equilibrium both the price of used capital and the volume of reallocation become procyclical. The second chapter studies the link between investment irreversibility and capital utilization. I show that when it is costly to downsize, firms respond to negative transitory profitability shocks by underutilizing their capital stock. In a partial equilibrium setting I derive both analytical and numerical results on the links between the level of irreversibility, the size and persistence of the shocks and the optimal utilization decision. In an industry-equilibrium model with heterogeneous firms and aggregate shocks, I endogenize the resale price of capital as in the first chapter and show that when this price falls, the option value of idle capital rises and the aggregate utilization rate decreases. The third chapter, co-authored with Esther Hauk and Albert Marcet, studies optimal policy in a class of models of endogenous partial information. The economy is hit by multiple shocks and the policy-maker cannot observe their realizations, but only aggregate outcomes. In general the solution to this signal extraction problem cannot be separated from the solution to the problem of finding the optimal policy and we show how to solve them jointly. We apply the result to a model of optimal fiscal policy with incomplete markets and show that the endogeneity of the signal extraction may lead to highly non-linear optimal policies.

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This research used psychological well-being data on thousands of people across several countries in the Middle East and North Africa (MENA) between the period of 2000 and 2013. It begins with data on the reported well-being levels of thousands of individuals in MENA and relates these data to the macroeconomic variables in each country. The macroeconomics variables to be analysed are the unemployment rate, GDP per capita and the inflation rate. With regards to the reported well-being levels, a random sample of people who live in some selected MENA countries were interviewed each year by the World Value Survey (WVS) and are asked many self-reported questions. Two kinds of questions are used in this thesis. The first is 'all things considered, how satisfied are you weuth your life as a whole?' where answers ranked from 1 being dissatisfied till 10 being satisfied. The second question is 'Taking all things together, would you say you are 1-not at all happy, 2-not very happy, 3-quite happy or 4-very happy'. Ordered probit equations are estimated in an attempt to relate the macroeconomics conditions with individual's happiness or satisfaction by measuring the real cost of unemployment on the population and measuring the effects of GDP changes in a country on the people living in that country. A further analysis to estimate the objective well-being situation in MENA countries and compare it or supplement it to the subjective happiness approach. Building on Sen's capability approach and taking into account factors such as life expectancy, inequality and corruption levels with the individual's happiness from self-reported surveys for the same set of countries in MENA. Two independent variables are the equality opinion question and the financial satisfaction question from the WVS. The first question is: 'Incomes should be made more equal?', where 1 means you agree completely and 10 means you don't. The other question is: 'How satisfied are you with the financial situation of your household?', where '1' means you are completely dissatisfied on this scale, and '10' means you are completely satisfied. The main goal of this thesis is to arrive with a quality of life assessment of the situation in the MENA region by combining a subjective approach presented by self-reported surveys with an objective approach that includes many social indicators.