Microeconomic Heterogeneity and Macroeconomic Shocks

35 Pages Posted: 27 Jun 2018

See all articles by Greg Kaplan

Greg Kaplan

University of Chicago - Department of Economics; Princeton University

Giovanni Violante

Princeton University

Multiple version iconThere are 2 versions of this paper

Date Written: June 27, 2018

Abstract

We analyze the role of household heterogeneity for the response of the macroeconomy to aggregate shocks. After summarizing how macroeconomists have incorporated household heterogeneity and market incompleteness in the study of economic fluctuations so far, we outline an emerging framework that combines Heterogeneous Agents (HA) with nominal rigidities, as in New Keynesian (NK) models, that is much better aligned with the micro evidence on consumption behavior than its Representative Agent (RA) counterpart. By simulating consistently calibrated versions of HANK and RANK models, we convey two broad messages. First, the degree of equivalence between models crucially depends on the shock being analyzed. Second, certain interesting macroeconomic questions concerning economic fluctuations can only be addressed within HA models, and thus the addition of heterogeneity broadens the range of problems that can be studied by economists. We conclude by recognizing that the development of HANK models is still in its infancy and by indicating promising directions for future work.

Keywords: Aggregate Shocks, Household Heterogeneity, Incomplete Markets, Model Equivalence, Representative Agent, Transmission Mechanism

Suggested Citation

Kaplan, Greg and Violante, Giovanni, Microeconomic Heterogeneity and Macroeconomic Shocks (June 27, 2018). Becker Friedman Institute for Research in Economics Working Paper No. 2018-44, Available at SSRN: https://ssrn.com/abstract=3203913 or http://dx.doi.org/10.2139/ssrn.3203913

Greg Kaplan (Contact Author)

University of Chicago - Department of Economics ( email )

1126 E. 59th St
Chicago, IL 60637
United States

Princeton University

Giovanni Violante

Princeton University ( email )

22 Chambers Street
Princeton, NJ 08544-0708
United States

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