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When Inequality Matters for Macro and Macro Matters for Inequality

Author

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  • Ahn, SeHyoun
  • Kaplan, Greg
  • Moll, Benjamin
  • Winberry, Thomas
  • Wolf, Christian

Abstract

We develop an efficient and easy-to-use computational method for solving a wide class of general equilibrium heterogeneous agent models with aggregate shocks, together with an open source suite of codes that implement our algorithms in an easy-to-use toolbox. Our method extends standard linearization techniques and is designed to work in cases when inequality matters for the dynamics of macroeconomic aggregates. We present two applications that analyze a two-asset incomplete markets model parameterized to match the distribution of income, wealth, and marginal propensities to consume. First, we show that our model is consistent with two key features of aggregate consumption dynamics that are difficult to match with representative agent models: (i) the sensitivity of aggregate consumption to predictable changes in aggregate income and (ii) the relative smoothness of aggregate consumption. Second, we extend the model to feature capital-skill complementarity and show how factor-specific productivity shocks shape dynamics of income and consumption inequality.

Suggested Citation

  • Ahn, SeHyoun & Kaplan, Greg & Moll, Benjamin & Winberry, Thomas & Wolf, Christian, 2017. "When Inequality Matters for Macro and Macro Matters for Inequality," CEPR Discussion Papers 12123, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:12123
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    References listed on IDEAS

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    1. Andreas Fagereng & Martin B. Holm & Gisle J. Natvik, 2016. "MPC heterogeneity and household balance sheets," Discussion Papers 852, Statistics Norway, Research Department.
    2. Adrien Auclert, 2015. "Monetary Policy and the Redistribution Channel," 2015 Meeting Papers 381, Society for Economic Dynamics.
    3. Greg Kaplan & Giovanni L. Violante, 2014. "A Model of the Consumption Response to Fiscal Stimulus Payments," Econometrica, Econometric Society, vol. 82(4), pages 1199-1239, July.
    4. Bruce Preston & Mauro Roca, 2007. "Incomplete Markets, Heterogeneity and Macroeconomic Dynamics," NBER Working Papers 13260, National Bureau of Economic Research, Inc.
    5. Den Haan, Wouter J. & Judd, Kenneth L. & Juillard, Michel, 2010. "Computational suite of models with heterogeneous agents: Incomplete markets and aggregate uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 34(1), pages 1-3, January.
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    Cited by:

    1. Timo Boppart & Per Krusell & Kurt Mitman, 2017. "Exploiting MIT Shocks in Heterogeneous-Agent Economies: The Impulse Response as a Numerical Derivative," NBER Working Papers 24138, National Bureau of Economic Research, Inc.
    2. Adam, Klaus & Weber, Henning, 2017. "Optimal trend inflation," Discussion Papers 25/2017, Deutsche Bundesbank.
    3. Adam, Klaus & Weber, Henning, 2017. "Optimal trend inflation," CFS Working Paper Series 579, Center for Financial Studies (CFS).

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