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Heterogeneous Households in a Sticky Price Model

  • Jae Won Lee

    ()

    (Rutgers University, Department of Economics)

This paper introduces heterogeneous households into an otherwise standard sticky-price model with industry-specific labor markets. Households differ in labor incomes and asset markets are incomplete. I show that household heterogeneity affects equilibrium dynamics nontrivially by amplifying price stickiness endogenously through wealth effects on labor supply. To quantify the importance of household heterogeneity in amplifying stickiness, I estimate and compare representative and heterogeneous household models. The quantitative exercise shows the heterogenous household model performs better than its representative counterpart in accounting for aggregate and sectoral dynamics in the U.S., while being more consistent with empirical evidence on nominal rigidity at the aggregate and sectoral levels, thanks to the stickiness endoge

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Paper provided by Rutgers University, Department of Economics in its series Departmental Working Papers with number 201001.

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Length: 20 pages
Date of creation: 12 Feb 2010
Date of revision:
Handle: RePEc:rut:rutres:201001
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