Essays on volatility

In Chapter 1, I summarize the motivation and the findings of this dissertation.; In Chapter 2, I show that volatility of household consumption, after accounting for predictable variation arising from movements in real interest rates, preferences and income shocks, increased between 1970 and 2002. For single parent households, and households headed by nonwhite or poorly educated individuals, this rise was significantly larger. This stands in sharp contrast with the dramatic fall in aggregate volatility of the US economy, and may have significant welfare implications. A spectacular fall in average covariances of consumption growth rates across households over this period accounts for the diverging paths of aggregate and household level volatilities.; In Chapter 3, we explain the economic volatility over the 1991-2004 period, in particular the rapid expansion and contraction of the knowledge sectors. Our hypothesis is that these sectors amplify the business cycle due to their increasing returns to scale, growing faster than others in an upswing and contracting faster in a downswing. To test this hypothesis we postulate a general equilibrium model with two sectors: one with increasing returns that are external to the firm and endogenously determined---the knowledge sector---and the other with constant returns to scale. We measure volatility of output, by 'real beta', and derive a 'resolving' equation, from which we prove that the increasing returns to scale sectors exhibit more volatility then other sectors. We validate the main results on US macro economic data of real GDP by industry of the 1977-2004 period, and provide policy conclusions.; In Chapter 4 we introduce involuntary unemployment into the above general equilibrium model. We define the 'labor beta' as the measure of employment volatility for the different sectors of the economy, and prove formally that employment in external IRS sectors is more volatile than in other sectors. We validate the results on the observed 'labor betas' during the 1948-2004 period. We discuss the jobless recovery after the 2001 recession in the US in the context of this model, and show that small firms and the service sector play a crucial role. We conclude with policy recommendations on how to create jobs in the knowledge economy.