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Micro Heterogeneity and Macroeconomic Policy

Periodic Reporting for period 2 - MICROTOMACROANDBACK (Micro Heterogeneity and Macroeconomic Policy)

Reporting period: 2019-05-01 to 2020-10-31

How does the economy respond to a change in monetary policy? How does an increase in government spending affect output, consumption, and employment? How should the government design transfer programs to stabilize the economy in recessions? The recent global financial crisis and ensuing Great Recession have renewed interest in these questions and revealed the serious shortcomings of the prevailing paradigm at the heart of macroeconomics. The field of macro has been dominated for the past several decades by representative-agent dynamic stochastic general equilibrium (DSGE) models–models whose main elements are derived from microeconomic theory, but that are inconsistent with vast empirical micro evidence on consumer behavior. We can do better.
The objective of this project is to provide answers to those pressing questions and to help policymakers and academics design better policies for warding off and managing future crises. In particular, the project seeks to better understand the interplay between inequality and monetary and fiscal policies. Understanding the two-way feedback between the two will help guide economies to having stable and inclusive growth.
The project so far has had several early successes that will be useful for both the scientific community and broader society. I developed a new methodology to facilitate answering the substantive questions outlined in the overall goals of the project. The methodology is broadly applicable and is already being used by other economic researchers to address pressing policy-relevant economic questions. Further, I have completed the first subproject on “Forward Guidance” that studies the effect of a new policy tool employed by central banks in the aftermath of the Global Financial Crises. The results of the project have been presented internationally at conferences, universities and central banks. They have helped influence the debate on how central banks can use communication about future policies to influence the economy.

Significant work has continued on the aspects of fiscal policy. Namely, understanding the stimulative effects of government spending and transfer programs. Further, I have investigated the role of consumer default policy for helping to stabilize the economy in booms and downturns.
I expect to continue making progress on the study of fiscal and monetary policies that will again help pave the way for future academic analysis and help guide policy makers.