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Heterogeneous Agents and Macro

Paper Session

Friday, Jan. 5, 2018 8:00 AM - 10:00 AM

Marriott Philadelphia Downtown, Meeting Room 410
Hosted By: Econometric Society

Uninsured Unemployment Risk and Optimal Monetary Policy

Edouard Challe
,
Ecole Polytechnique

Abstract

I study optimal monetary policy in a New Keynesian economy wherein house-
holds precautionary-save against uninsured, endogenous unemployment risk. In this economy greater unemployment risk raises desired savings, causing aggregate demand to fall and feed back to greater unemployment risk. I show this de‡ationary feedback loop to be constrained-inefficient and to call for an accommodative monetary policy response: after a contractionary
aggregate shock the policy rate should be kept signi…cantly lower and for longer than in the perfect-insurance benchmark. For example, the usual prescription obtained under perfect insurance of a hike in the policy rate in the face of a bad supply (i.e., productivity or cost-push) shock is easily overturned. If implemented, the optimal policy e¤ectively breaks the de‡flationary feedback loop and takes the dynamics of the imperfect-insurance economy close to that of the perfect-insurance benchmark.

Recursive Equilibrium in Krusell and Smith (1998)

Dan Vu Cao
,
Georgetown University

Abstract

I combine the tools developed in two important and independent literatures - one on large economies started with Aumann (1964) and the other on dynamically incomplete markets, notably Duffie et al. (1994) - to study Krusell and Smith's incomplete markets economy with both idiosyncratic and aggregate shocks. I prove the existence of generalized recursive equilibrium and characterize several important properties of the equilibrium variables. The equilibrium process admits an ergodic measure, which enables the application of the ergodic theorem for the simulation and calibration of the model. Without aggregate shocks, the existence and some characterization results carry over to economies with only idiosyncratic shocks such as Huggett (1997)'s economy.

The Fiscal Multiplier

Marcus Hagedorn
,
University of Oslo
Iourii Manovskii
,
University of Pennsylvania
Kurt Elliott Mitman
,
Stockholm University

Abstract

We measure the size of the fiscal multiplier using a model with incomplete markets and rigid prices and wages. Allowing for incomplete markets instead of complete markets---the prevalent assumption in the literature---comes with two advantages. First, the incomplete markets model delivers a realistic distribution of the marginal propensity to consume across the population, whereas all households counterfactually behave according to the permanent income hypothesis if markets are complete. Second, in our model the equilibrium response of prices, output, consumption and employment to fiscal stimulus is uniquely determined for any arbitrary monetary policy including at the zero lower bound. We find that market incompleteness plays the key role in determining the size of the fiscal multiplier, which is slightly above or below 1 depending on whether spending is tax or deficit financed. The size of fiscal multiplier remains similar in a liquidity trap.

When Inequality Matters for Macro and Macro Matters for Inequality

SeHyoun Ahn
,
Princeton University
Greg Warren Kaplan
,
University of Chicago
Benjamin Moll
,
Princeton University
Thomas Winberry
,
University of Chicago
Christian Wolf
,
Princeton University

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.
JEL Classifications
  • A1 - General Economics