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Requiem for the Representative Consumer? Aggregate Implications of Microeconomic Consumption Behavior

  • Christopher D. Carroll

Macroeconomists pursuing microfoundations for aggregate consumption have generally adopted one of two approaches: either to model microeconomic consumption behavior carefully and then to aggregate, or to thoroughly understand the behavior of a `representative consumer' in general equilibrium, then to introduce microeconomic risk and heterogeneity. The broad conclusion from the `bottom up' approach has been that precautionary saving and microeconomic heterogeneity can profoundly change behavior (Stephen P. Zeldes (1989); Angus S. Deaton (1991); Christopher D. Carroll (1992)). The broad conclusion from the `top down' approach has been that precautionary saving is of little importance in determining the aggregate capital stock (S. Rao Aiyagari (1994); Per Krusell and Anthony A. Smith (1998)), leading some economists to conclude that heterogeneity is unimportant for macroeconomic purposes. This paper shows that while general equilibrium effects do imply that the aggregate magnitude of precautionary saving is modest, nevertheless when a model with uninsurable idiosyncratic risk is modified so that it can match the key micro facts, it produces behavior very different in important respects from that produced by the representative agent economy. This leads to the conclusion that for many purposes, the representative consumer model should be abandoned in favor of a model which matches key microeconomic facts.

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 90 (2000)
Issue (Month): 2 (May)
Pages: 110-115

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Handle: RePEc:aea:aecrev:v:90:y:2000:i:2:p:110-115
Note: DOI: 10.1257/aer.90.2.110
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  1. Gourinchas, P.O. & Parker, J.A., 1997. "Consumption Over the Life Cycle," Working papers 9722, Wisconsin Madison - Social Systems.
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  16. Huggett, Mark, 1996. "Wealth distribution in life-cycle economies," Journal of Monetary Economics, Elsevier, vol. 38(3), pages 469-494, December.
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