Microeconomic Heterogeneity and Macroeconomic Shocks

Abstract

I n this essay, we discuss the emerging literature in macroeconomics that combines heterogeneous agent models, nominal rigidities, and aggregate shocks. This literature opens the door to the analysis of distributional issues, economic fluctuations, and stabilization policies-all within the same framework. Quantitative macroeconomic models have integrated heterogeneous agents and incomplete markets for nearly three decades, but they have been mainly used for the investigation of consumption and saving behavior, inequality, redistributive policies, economic mobility, and other cross-sectional phenomena. Representative agent models have remained the benchmark in the study of aggregate fluctuations (for reasons we will discuss later). However, the Great Recession bluntly exposed the shortcomings of a representative-agent approach to business cycle analysis. A broadly shared interpretation of the Great Recession places its origins in housing and credit markets. The collapse in house prices affected households differently, depending on the composition of their balance sheets. The extent to which this

Microeconomic Heterogeneity and Macroeconomic Shocks

“…The coexistence of a low-return liquid asset and a high-return illiquid asset creates the conditions for the emergence of wealthy hand-to-mouth households (who hold little or no liquid wealth despite owning sizable amounts of illiquid assets) alongside poor hand-to-mouth households (who hold little net worth). The model is able to replicate the observation that around one-third of US households are hand-to-mouth with high marginal propensities to consume and, among these, around two-thirds are wealthy hand-to-mouth and one-third are poor handto-mouth (Kaplan, Violante, and Weidner 2014). The remaining households hold sufficient liquid wealth that their consumption dynamics are similar to those of the representative agent.…”

“…A number of studies reveal that both the sign and size of the effect of changes in interest rates on consumption depend on households' net asset positions (Flodén, Kilström, Sigurdsson, and Vestman 2016;Cloyne, Ferreira, and Surico 2016). Empirical analyses using micro data on household portfolios also conclude that a sizable fraction of households (around one-third in the United States) hold close to zero liquid wealth or are near their borrowing limits (Kaplan, Violante, and Weidner 2014). Empirically, these households do not react to movements in interest rates (Vissing-Jørgensen 2002).…”

“…wealth destruction translated into a fall in expenditures was determined by marginal propensities to consume, which are also very heterogeneous and closely related to households' access to liquidity (Mian, Rao, and Su 2013;Kaplan, Violante, and Weidner 2014). Finally, this drop in aggregate consumer demand and the contemporaneous breakdown in bank lending to businesses (as explained by Gertler and Gilchrist in this issue) resulted in a severe contraction of labor demand which materialized unevenly across different occupations and skill levels.…”

Can Consumption Growth in China Keep Up as Investment Slows?

“…Kaplan et al (2014)), or with New Keynesian models with heterogeneous agents (e.g. Kaplan and Violante (2018)).…”

Heterogeneity and Asymmetric Macroeconomic Effects of Changes in Loan-to-Value Limits

“…Next, we check for robustness with respect to using an alternative LTV measure which equals our baseline measure through 2010 but for which we extrapolate more recent years using the crosssectional average of the LTV from the Loan Level Data (LLD). 29 Our reasons for doing so are that the number of observations on which our baseline series is based is lowest in 2010-2015 and that the ten percentage point drop in 2014 is by far the largest one-year change in the series. The levels of the baseline and extrapolated series are similar in 2011-2013 but the extrapolated LTV drops by only half a percentage point in 2014.…”