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The Representative Household Assumption Requires sustainable Heterogeneity in Dynamic Models

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  • Harashima, Taiji

Abstract

The assumption of the representative household defined as the average of all households is impossible in dynamic models if households are heterogeneous in their time preference rates because, as is well known, the most patient household eventually prevails. Because time preference rates are unquestionably heterogeneous across economies and time periods, macroeconomics studies using the representative household assumption in dynamic models are fallacious. I present an alternative definition of the representative household based on the concept of sustainable heterogeneity. By this definition, use of the representative household assumption becomes possible in dynamic models.

Suggested Citation

  • Harashima, Taiji, 2014. "The Representative Household Assumption Requires sustainable Heterogeneity in Dynamic Models," MPRA Paper 57520, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:57520
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    References listed on IDEAS

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    12. Harashima, Taiji, 2012. "Sustainable Heterogeneity as the Unique Socially Optimal Allocation for Almost All Social Welfare Functions," MPRA Paper 40938, University Library of Munich, Germany.
    13. Robert A. Becker, 1980. "On the Long-Run Steady State in a Simple Dynamic Model of Equilibrium with Heterogeneous Households," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 95(2), pages 375-382.
    14. Harashima, Taiji, 2009. "A Theory of Total Factor Productivity and the Convergence Hypothesis: Workers’ Innovations as an Essential Element," MPRA Paper 15508, University Library of Munich, Germany.
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    Cited by:

    1. Harashima, Taiji, 2018. "Bubbles and Bluffs: Risk Lovers Can Survive Economically," MPRA Paper 83615, University Library of Munich, Germany.
    2. Harashima, Taiji, 2014. "Time Preference Shocks," MPRA Paper 60205, University Library of Munich, Germany.
    3. Harashima, Taiji, 2020. "A Theory of the Credit-to-GDP Gap: Using Credit Gaps to Predict Financial Crises," MPRA Paper 111732, University Library of Munich, Germany.
    4. Harashima, Taiji, 2015. "Bubbles, Bluffs, and Greed," MPRA Paper 64361, University Library of Munich, Germany.
    5. Taiji HARASHIMA, 2016. "A Theory Of Deflation: Can Expectations Be Influenced By A Central Bank?," Theoretical and Practical Research in the Economic Fields, ASERS Publishing, vol. 7(2), pages 98-145.
    6. Harashima, Taiji, 2016. "The Cause of the Great Recession: What Caused the Downward Shift of the GDP Trend in the United States?," MPRA Paper 69215, University Library of Munich, Germany.

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    More about this item

    Keywords

    The representative household; Sustainable heterogeneity; Dynamic models; The rate of time preference; Macroeconomics;
    All these keywords.

    JEL classification:

    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General

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