Working Paper: NBER ID: w24734
Authors: Greg Kaplan; Giovanni L. Violante
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: household heterogeneity; aggregate shocks; macroeconomic dynamics
JEL Codes: D1; D3; E0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| household heterogeneity (D19) | macroeconomic response to aggregate shocks (E13) |
| demand shocks (E39) | similar aggregate dynamics in HANK and RANK models (C59) |
| technology shocks (D89) | different aggregate responses in HANK and RANK models (C59) |
| aggregate shocks (E10) | household inequality (D31) |
| HANK models (C59) | account for household consumption behavior (D10) |
| HANK models (C59) | better account for marginal propensities to consume (MPC) (E21) |
| HANK models (C59) | better account for sensitivity to income versus interest rates (E43) |