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Can a Representative-Agent Model Represent a Heterogeneous-Agent Economy

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  • Sungbae An
  • Yongsung Chang
  • Sun-Bin Kim

Abstract

Accounting for observed fluctuations in aggregate employment, consumption, and real wage using the optimality conditions of a representative household requires preferences that are incompatible with economic priors. In order to reconcile theory with data, we construct a model with heterogeneous agents whose decisions are difficult to aggregate because of incomplete capital markets and the indivisible nature of labor supply. If we were to explain the model-generated aggregate time series using decisions of a stand-in household, such a household must have a nonconcave or unstable utility as is often found with the aggregate US data. (JEL E13, E24)

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Journal: Macroeconomics.

Volume (Year): 1 (2009)
Issue (Month): 2 (July)
Pages: 29-54

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Handle: RePEc:aea:aejmac:v:1:y:2009:i:2:p:29-54

Note: DOI: 10.1257/mac.1.2.29
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References

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  1. S. Rao Aiyagari, 1993. "Uninsured idiosyncratic risk and aggregate saving," Working Papers 502, Federal Reserve Bank of Minneapolis.
  2. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2006. "Business cycle accounting," Staff Report 328, Federal Reserve Bank of Minneapolis.
  3. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232.
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  7. MaCurdy, Thomas E, 1981. "An Empirical Model of Labor Supply in a Life-Cycle Setting," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1059-85, December.
  8. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
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  11. Yongsung Chang & Sun-Bin Kim, 2007. "Heterogeneity and Aggregation: Implications for Labor-Market Fluctuations," American Economic Review, American Economic Association, vol. 97(5), pages 1939-1956, December.
  12. Ghysels, Eric & Hall, Alastair, 1990. "Are consumption-based intertemporal capital asset pricing models structural?," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 121-139.
  13. Yongsung Chang & Sun-Bin Kim, 2006. "From Individual To Aggregate Labor Supply: A Quantitative Analysis Based On A Heterogeneous Agent Macroeconomy ," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(1), pages 1-27, 02.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Heterogeneity is crucial for business cycle models
    by Economic Logician in Economic Logic on 2009-01-27 10:22:00
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Cited by:
  1. Yongsung Chang & Sun-Bin Kim & Frank Schorfheide, 2010. "Labor-Market Heterogeneity, Aggregation, and the Lucas Critique," NBER Working Papers 16401, National Bureau of Economic Research, Inc.
  2. Michael Keane & Richard Rogers, 2012. "Reconciling Micro and Macro Labor Supply Elasticities: A Structural Perspective," Economics Series Working Papers 2012-W12, University of Oxford, Department of Economics.
  3. Richard Rogerson, 2010. "Individual and Aggregate Labor Supply With Coordinated Working Times," NBER Working Papers 16636, National Bureau of Economic Research, Inc.
  4. Alonso-Ortiz, Jorge & Rogerson, Richard, 2010. "Taxes, transfers and employment in an incomplete markets model," Journal of Monetary Economics, Elsevier, vol. 57(8), pages 949-958, November.

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