Project description
Studying aggregate and idiosyncratic risks in Macroeconomics
Following the Great Recession of 2008-2009, two economic phenomena emerged: the return of aggregate volatility and the rise in inequality. A new literature emerged to address this issue, adding heterogeneity to business cycle models (HANK). However, the focus on certainty-equivalent solutions in aggregates restricts the interaction of both phenomena. The ERC-funded AIRMAC project aims to develop a computational toolbox for studying the strength of aggregate and idiosyncratic risks in various areas, such as inequality, asset returns, and business cycles. The project is divided into four parts, each focusing on a different aspect. It seeks to answer fundamental questions in Macroeconomics and has an extremely high return.
Objective
Since the Great Recession of 08/09, two interrelated economic phenomena challenge politics and research alike. First, the return of aggregate volatility marking the end of the Great Moderation. Second, the rise in inequality to levels last seen during the Gilded Age. A new literature has responded to this challenge by adding heterogeneity to business cycle models (HANK). This is a major step, but the focus on certainty-equivalent solutions in aggregates restricts the interaction of both phenomena.
My research agenda aims to make ground-breaking progress by developing a new computational toolbox that allows to study the relative strength of aggregate and idiosyncratic risks and their interaction in inequality, asset returns, and business cycles.
Part I develops a sparse higher-order perturbation solution for HANK models. Smart use of the modularity of idiosyncratic and aggregate model components makes estimation feasible, which is key for quantification.
Part II measures heterogeneity in the exposure to aggregate risk and quantifies its contribution inequality. The volatility of wages, portfolio returns, and tax rates differs across the distribution, and this affects inequality via household portfolio decisions.
Part III decomposes the capital premium into the parts coming from idiosyncratic and aggregate risk. Large parts of the capital stock feature trading costs that can explain part of the equity premium, which makes the equity premium puzzle less severe.
Part IV examines the cost of business cycles and novel benefits of stabilization policies. By reducing aggregate risk, policy allows households to hold less liquid portfolios and increase investment into capital.
Part II-IV contribute to fundamental questions in macroeconomics: the welfare costs of business cycles, the benefits of fiscal vs. monetary stabilization, and the drivers of inequality and asset returns. My agenda is ambitious, but the importance of the questions imply an extremely high return.
Fields of science (EuroSciVoc)
CORDIS classifies projects with EuroSciVoc, a multilingual taxonomy of fields of science, through a semi-automatic process based on NLP techniques. See: The European Science Vocabulary.
CORDIS classifies projects with EuroSciVoc, a multilingual taxonomy of fields of science, through a semi-automatic process based on NLP techniques. See: The European Science Vocabulary.
- social sciences economics and business economics macroeconomics
- social sciences sociology governance taxation
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Keywords
Project’s keywords as indicated by the project coordinator. Not to be confused with the EuroSciVoc taxonomy (Fields of science)
Project’s keywords as indicated by the project coordinator. Not to be confused with the EuroSciVoc taxonomy (Fields of science)
Programme(s)
Multi-annual funding programmes that define the EU’s priorities for research and innovation.
Multi-annual funding programmes that define the EU’s priorities for research and innovation.
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HORIZON.1.1 - European Research Council (ERC)
MAIN PROGRAMME
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Topic(s)
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Calls for proposals are divided into topics. A topic defines a specific subject or area for which applicants can submit proposals. The description of a topic comprises its specific scope and the expected impact of the funded project.
Funding Scheme
Funding scheme (or “Type of Action”) inside a programme with common features. It specifies: the scope of what is funded; the reimbursement rate; specific evaluation criteria to qualify for funding; and the use of simplified forms of costs like lump sums.
Funding scheme (or “Type of Action”) inside a programme with common features. It specifies: the scope of what is funded; the reimbursement rate; specific evaluation criteria to qualify for funding; and the use of simplified forms of costs like lump sums.
HORIZON-ERC - HORIZON ERC Grants
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Call for proposal
Procedure for inviting applicants to submit project proposals, with the aim of receiving EU funding.
Procedure for inviting applicants to submit project proposals, with the aim of receiving EU funding.
(opens in new window) ERC-2023-STG
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Net EU financial contribution. The sum of money that the participant receives, deducted by the EU contribution to its linked third party. It considers the distribution of the EU financial contribution between direct beneficiaries of the project and other types of participants, like third-party participants.
72074 Tuebingen
Germany
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