Heterogeneity, Monetary Policy and Economic Fluctuations

Informations projet

HEMPEF

N° de convention de subvention: 882332

DOI

10.3030/882332

Projet clôturé

Date de signature de la CE 11 Mai 2020

Date de début 1 Juillet 2020

Date de fin 31 Decembre 2024

Financé au titre de

• EXCELLENT SCIENCE - European Research Council (ERC)

Coût total

€ 923 750,00

Contribution de l’UE

€ 923 750,00

Coordonné par

Centre de Recerca en Economia Internacional (CREI)
Spain

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

Période du rapport: 2023-07-01 au 2024-12-31

Résumé du contexte et des objectifs généraux du projet

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.

Travail effectué depuis le début du projet jusqu’à la fin de la période considérée dans le rapport et principaux résultats atteints jusqu’à présent

“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.

Progrès au-delà de l’état des connaissances et impact potentiel prévu (y compris l’impact socio-économique et les conséquences sociétales plus larges du projet jusqu’à présent)

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