Final Report Summary - MACROHETEROGENEITY (Macroeconomic Dynamics with Heterogeneous Agents)
My research supported by ERC funds proposes a novel approach to evaluate the transmission mechanism of macroeconomic stabilization policies across different groups of society using micro data. The three main conclusions from this research program are that
(i) there is pervasive evidence of heterogeneity in the responses of households and firms to fiscal and monetary policies. The heterogeneity is more pronounced for durable goods (especially new vehicles) but it is significant also for non-durable goods and services. On the other hand, the heterogeneity is far less marked for income.
(ii) households more exposed to mortgage debt tend to adjust their expenditure by more following an unexpected change in macroeconomic policies. Together with the finding that the income responses of both households with mortgage and households without mortgage are not significantly different from one other, this suggests that mortgage debt is a very strong predictor of the presence of liquidity constrained.
(iii) the estimated heterogeneity has first order impact on the aggregate real economy in a way that it would be very hard (if not impossible) to identify using aggregate variables and linear models. Liquidity constraints for lower income/less educated households, for instance, is an often cited explanation for the sizable aggregate effects of macroeconomic policy on GDP and consumption that are typically reported in the empirical macro literature. But this group is too small a share of population to rationalize (on their own) the sizable macro estimates. On the other hand, mortgagors, who tend to hold little liquid wealth despite owning sizable housing equity, account for about half of population in advanced economies, thereby providing a novel interpretation for the sizable impact of monetary and fiscal policy on the macro-economy.
(i) there is pervasive evidence of heterogeneity in the responses of households and firms to fiscal and monetary policies. The heterogeneity is more pronounced for durable goods (especially new vehicles) but it is significant also for non-durable goods and services. On the other hand, the heterogeneity is far less marked for income.
(ii) households more exposed to mortgage debt tend to adjust their expenditure by more following an unexpected change in macroeconomic policies. Together with the finding that the income responses of both households with mortgage and households without mortgage are not significantly different from one other, this suggests that mortgage debt is a very strong predictor of the presence of liquidity constrained.
(iii) the estimated heterogeneity has first order impact on the aggregate real economy in a way that it would be very hard (if not impossible) to identify using aggregate variables and linear models. Liquidity constraints for lower income/less educated households, for instance, is an often cited explanation for the sizable aggregate effects of macroeconomic policy on GDP and consumption that are typically reported in the empirical macro literature. But this group is too small a share of population to rationalize (on their own) the sizable macro estimates. On the other hand, mortgagors, who tend to hold little liquid wealth despite owning sizable housing equity, account for about half of population in advanced economies, thereby providing a novel interpretation for the sizable impact of monetary and fiscal policy on the macro-economy.