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Implications of Wealth Heterogeneity For Macroeconomics

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  • Christopher D. Carroll

Abstract

Today’s dominant strain of macroeconomic models supposes that aggregate consumption can be understood by assuming the existence of a ‘representative agent’ whose behavior rationalizes observed outcomes. But representative agent models yield embarrassingly implausible (and empirically inaccurate) descriptions of consumption behavior. When push comes to shove, real-world forecasters (including those at the Fed) properly disregard these implications. As a result, consumption forecasting remains very much a seat-of-the-pants enterprise. I will argue that if the representative agent assumption is replaced with a model that generates wealth heterogeneity that matches the empirical data, the improved model can provide a sensible analysis of economic questions like "What might the consumption response be to economic stimulus payments?"

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Paper provided by The Johns Hopkins University,Department of Economics in its series Economics Working Paper Archive with number 597.

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Date of creation: May 2012
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Handle: RePEc:jhu:papers:597

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  1. Karl E. Case & Robert J. Shiller & John M. Quigley, 2001. "Comparing Wealth Effects: The Stock Market Versus the Housing Market," NBER Working Papers 8606, National Bureau of Economic Research, Inc.
  2. Claudia R. Sahm & Matthew D. Shapiro & Joel Slemrod, 2011. "Check in the Mail or More in the Paycheck: Does the Effectiveness of Fiscal Stimulus Depend on How It Is Delivered?," BCL working papers 53, Central Bank of Luxembourg.
  3. Sabelhaus, John & Song, Jae, 2010. "The great moderation in micro labor earnings," Journal of Monetary Economics, Elsevier, vol. 57(4), pages 391-403, May.
  4. Richard Disney & John Gathergood & Andrew Henley, 2010. "House Price Shocks, Negative Equity, and Household Consumption in the United Kingdom," Journal of the European Economic Association, MIT Press, vol. 8(6), pages 1179-1207, December.
  5. Kaplan, Greg & Violante, Giovanni L, 2011. "A Model of the Consumption Response to Fiscal Stimulus Payments," CEPR Discussion Papers 8562, C.E.P.R. Discussion Papers.
  6. Carroll, Christopher D. & Slacalek, Jiri & Tokuoka, Kiichi, 2014. "Buffer-stock saving in a Krusell-Smith world," Working Paper Series 1633, European Central Bank.
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