Heterogeneity, Monetary Policy and Economic Fluctuations

Project Information

HEMPEF

Grant agreement ID: 882332

DOI

10.3030/882332

Project closed

EC signature date 11 May 2020

Start date 1 July 2020

End date 31 December 2024

Funded under

• EXCELLENT SCIENCE - European Research Council (ERC)

Total cost

€ 923 750,00

EU contribution

€ 923 750,00

Coordinated by

Centre de Recerca en Economia Internacional (CREI)
Spain

Periodic Reporting for period 3 - HEMPEF (Heterogeneity, Monetary Policy and Economic Fluctuations)

Reporting period: 2023-07-01 to 2024-12-31

Summary of the context and overall objectives of the project

Most efforts at modelling aggregate fluctuations in recent decades have relied on frameworks that assume infinitely-lived representative households and firms. A number of researchers have called into question that strategy and have instead introduced different dimensions of heterogeneity in otherwise conventional macro models. Needless to say, the resulting models can address issues pertaining to the distributional consequences of different shocks or policy interventions that one cannot address in representative agent models. This is, however, at the cost of increasing significantly the complexity of the models and the methods used to solve for their equilibrium, and to limit the intuition one obtains about the main economic channels at work. The overarching objective of my project is to understand the extent to which and under what assumptions heterogeneity plays a significant role in accounting for an economy’s aggregate response to aggregate shocks, the key focus of macroeconomics. This is done from both a theoretical and an empirical perspective.

The main findings of my research is that heterogeneity, in the form of household-level idiosyncratic income risk, plays a very limited role in aggregate fluctuations, in both models and in the data. On the other hand, the existence of different net asset positions (borrowers vs lenders) and sources of income (workers vs capitalists), and the fact that these differences are correlated with differences in the marginal propensity to consume cannot be neglected when modeling aggregate fluctuations.

Work performed from the beginning of the project to the end of the period covered by the report and main results achieved so far

“Idiosyncratic Income Risk and Aggregate Fluctuations” (with D. Debortoli), published in American Economic Journal: Macroeconomics (2024). This paper shows how idiosyncratic income risk affects aggregate fluctuations through variations on a risk shifter, which are quantitatively small.
“Heterogeneity and Aggregate Fluctuations: Insights from TANK Models” (with D. Debortoli), forthcoming in NBER Macroeconomics Annual (2025). The paper show how a generalized TANK model can approximate well the aggregate properties of a variety of HANK models. This paper was presented, among many other venues, to an ECB Task Force on Heterogeneity.
“Monetary Policy and Endogenous Financial Crises” (with F. Boissay, F. Collard, and C. Manea), under revision for the Review of Economic Studies. This paper show the potential role of monetary policy in preventing financial crises, in an environment in which the latter may emerge as a result of capital overaccumulation.
“Heterogeneity and Aggregate Consumption: An Empirical Assessment” (with D. Debortoli), working paper. In this paper we analyze empirically the impact of variations in the wealth distribution on aggregate consumption dynamics. We show that role to be quantitatively small.
I organized CREI Workshop on Heterogeneity and Aggregate Fluctuations, May 21-22 2024
I have presented the research at different stages at numerous conferences and seminars.

Progress beyond the state of the art and expected potential impact (including the socio-economic impact and the wider societal implications of the project so far)

The ultimate goal of the research funded by the present grant is twofold:

a) to evaluate the extent to which versions of the representative-agent New Keynesian model that currently dominate the analysis in academic and policy circles remains valid as frameworks for understanding aggregate fluctuations and their interaction with macro policies.
b) to develop tractable alternatives to the representative agent NK model that incorporate the main channels and mechanisms through which heterogeneity affects aggregate fluctuations in actual economies.

Needless to say, addressing these questions needs a collective effort that currently involves dozens of researchers, mostly in Europe and the US, and to which I hope my research has contributed significantly.

Aggregate Output Simulations under HANK and TANK