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Can a Representative Agent Model Represent a Heterogeneous Agent Economy?

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  • Sungbae An

    (Singapore Management University)

  • Yongsung Chang

    (University of Rochester and Seoul National University)

  • Sun-Bin Kim

    (Department of Economics, Korea University)

Abstract

Accounting for observed uctuations in aggregate employment, consumption, and real wage using optimality conditions of a representative household often requires preferences that are incompatible with economic priors (e.g., Mankiw, Rotemberg, and Summers, 1985). This discrepancy between the equilibrium model and the aggregate data is often viewed as evidence of the failure of labor-market clearing. We argue that such a conclusion is premature. We construct a model economy where all prices are exible and all markets clear at all times but household decisions are not readily aggregated because of incomplete capital markets and the indivisible nature of labor supply. We demonstrate that if we were to explain the model-generated aggregate time series using decisions of a "fictitious" stand-in household, such a household is likely to have a non-concave or unstable utility. Our analysis suggests that the representative agent model often fails to represent an equilibrium outcome of a heterogeneous agent economy.

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Bibliographic Info

Paper provided by Institute of Economic Research, Korea University in its series Discussion Paper Series with number 0714.

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Date of creation: 2007
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Handle: RePEc:iek:wpaper:0714

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Keywords: Representative agent model; Aggregation; Heterogeneity; Incomplete Markets; Indivisible Labor; GMM Estimation;

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References

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  1. Yongsung Chang & Sun-Bin Kim, 2003. "From individual to aggregate labor supply : a quantitative analysis based on a heterogeneous agent macroeconomy," Working Paper 03-05, Federal Reserve Bank of Richmond.
  2. Rogerson, Richard, 1988. "Indivisible labor, lotteries and equilibrium," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 3-16, January.
  3. Hall, Robert E, 1997. "Macroeconomic Fluctuations and the Allocation of Time," Journal of Labor Economics, University of Chicago Press, vol. 15(1), pages S223-50, January.
  4. S. Rao Aiyagari, 1993. "Uninsured idiosyncratic risk and aggregate saving," Working Papers 502, Federal Reserve Bank of Minneapolis.
  5. V.V. Chari & Patrick J. Kehoe & Ellen McGrattan, 2004. "Business Cycle Accounting," NBER Working Papers 10351, National Bureau of Economic Research, Inc.
  6. Altonji, Joseph G, 1986. "Intertemporal Substitution in Labor Supply: Evidence from Micro Data," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages S176-S215, June.
  7. Scheinkman, Jose A & Weiss, Laurence, 1986. "Borrowing Constraints and Aggregate Economic Activity," Econometrica, Econometric Society, vol. 54(1), pages 23-45, January.
  8. Dunn, Kenneth B. & Singleton, Kenneth J., 1986. "Modeling the term structure of interest rates under non-separable utility and durability of goods," Journal of Financial Economics, Elsevier, vol. 17(1), pages 27-55, September.
  9. Blundell,Richard & Newey,Whitney K. & Persson,Torsten (ed.), 2006. "Advances in Economics and Econometrics," Cambridge Books, Cambridge University Press, number 9780521871525, April.
  10. 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.
  11. Solon, Gary & Barsky, Robert & Parker, Jonathan A, 1994. "Measuring the Cyclicality of Real Wages: How Important Is Composition Bias?," The Quarterly Journal of Economics, MIT Press, vol. 109(1), pages 1-25, February.
  12. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
  13. 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.
  14. 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.
  15. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  16. Blundell,Richard & Newey,Whitney K. & Persson,Torsten (ed.), 2006. "Advances in Economics and Econometrics," Cambridge Books, Cambridge University Press, number 9780521692083, April.
  17. 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.
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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. Michael P. Keane & Richard Rogerson, 2011. "Reconciling Micro and Macro Labor Supply Elasticities: A Structural Perspective," NBER Working Papers 17430, National Bureau of Economic Research, Inc.
  2. Jorge Alonso-Ortiz & Richard Rogerson, 2010. "Taxes, transfers, and employment in an incomplete markets model," CQER Working Paper 2010-07, Federal Reserve Bank of Atlanta.
  3. Chang, Yongsung & Schorfheide, Frank, 2010. "Labor-Market Heterogeneity, Aggregation, and the Lucas Critique," CEPR Discussion Papers 8039, C.E.P.R. Discussion Papers.
  4. Richard Rogerson, 2010. "Individual and Aggregate Labor Supply With Coordinated Working Times," NBER Working Papers 16636, National Bureau of Economic Research, Inc.

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