Macroeconomics With Heterogeneity: A Practical Guide
AbstractThis article reviews macroeconomic models with heterogeneous households. A key question for the relevance of these models concerns the degree to which markets are complete. This is because the existence of complete markets imposes restrictions on (i) how much heterogeneity matters for aggregate phenomena and (ii) the types of cross-sectional distributions that can be obtained. The degree of market incompleteness, in turn, depends on two factors: (i) the richness of insurance opportunities provided by the economic environment and (ii) the nature and magnitude of idiosyncratic risks to be insured. First, I review a broad collection of empirical evidence—from econometric tests of “full insurance,” to quantitative and empirical analyses of the permanent income (“self-insurance”) model that examine how it fits the facts about life cycle allocations, to studies that try to directly measure where economies place between these two benchmarks (“partial insurance”). The empirical evidence I survey reveals significant uncertainty in the profession regarding the magnitudes of idiosyncratic risks as well as whether or not these risks have increased since the 1970s. An important difficulty stems from the fact that inequality often arises from a mixture of idiosyncratic risk and fixed (or predictable) heterogeneity, making the two challenging to disentangle. I also discuss applications of incomplete markets models to trends in wealth, consumption, and earnings inequality both over the life cycle and over time, where this challenge is evident. Third, I discuss “approximate” aggregation—the finding that some incomplete markets models generate aggregate implications very similar to representative-agent models. What approximate aggregation does and does not imply is illustrated through several examples. Finally, I discuss some computational issues relevant for solving and calibrating such models and I provide a simple yet fully parallelizable global optimization algorithm that can be used to calibrate heterogeneous agent models.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17622.
Date of creation: Nov 2011
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Find related papers by JEL classification:
- E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
- E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
- E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-12-13 (All new papers)
- NEP-CBA-2011-12-13 (Central Banking)
- NEP-DGE-2011-12-13 (Dynamic General Equilibrium)
- NEP-MAC-2011-12-13 (Macroeconomics)
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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- Macroeconomics With Heterogeneity: A Practical Guide
by Christian Zimmermann in NEP-DGE blog on 2011-12-16 22:15:22
- Matteo Iacoviello & Marina Pavan, 2009.
"Housing and debt over the life cycle and over the business cycle,"
09-12, Federal Reserve Bank of Boston.
- Matteo Iacoviello & Marina Pavan, 2011. "Housing and Debt over the Life Cycle and over the Business Cycle," Working Papers 2011/04, Economics Department, Universitat Jaume I, Castellón (Spain).
- Matteo Iacoviello & Marina Pavan, 2009. "Housing and Debt Over the Life Cycle and Over the Business Cycle," Boston College Working Papers in Economics 723, Boston College Department of Economics, revised 19 Sep 2011.
- Matteo Iacoviello & Marina Pavan, 2011. "Housing and debt over the life cycle and over the business cycle," International Finance Discussion Papers 1032, Board of Governors of the Federal Reserve System (U.S.).
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