This website uses cookies.

By clicking the "Accept" button or continuing to browse our site, you agree to first-party and session-only cookies being stored on your device to enhance site navigation and analyze site performance and traffic. For more information on our use of cookies, please see our Privacy Policy.

  1. Home
  2. Journals
  3. Journal of Economic Perspectives
  4. Summer 2018
  5. Microeconomic Heterogeneity and Macroeconomic Shocks

Microeconomic Heterogeneity and Macroeconomic Shocks

  • Greg Kaplan
  • Giovanni L. Violante
Journal of Economic Perspectives
vol. 32, no. 3, Summer 2018
(pp. 167-94)
Download Full Text PDF
(Complimentary)

Abstract

In this essay, we discuss the emerging literature in macroeconomics that combines heterogeneous agent models, nominal rigidities, and aggregate shocks. This literature opens the door to the analysis of distributional issues, economic fluctuations, and stabilization policies—all within the same framework. In response to the limitations of the representative agent approach to economic fluctuations, a new framework has emerged that combines key features of heterogeneous agents (HA) and New Keynesian (NK) economies. These HANK models offer a much more accurate representation of household consumption behavior and can generate realistic distributions of income, wealth, and, albeit to a lesser degree, household balance sheets. At the same time, they can accommodate many sources of macroeconomic fluctuations, including those driven by aggregate demand. In sum, they provide a rich theoretical framework for quantitative analysis of the interaction between cross-sectional distributions and aggregate dynamics. In this article, we outline a state-of-the-art version of HANK together with its representative agent counterpart, and convey two broad messages about the role of household heterogeneity for the response of the macroeconomy to aggregate shocks: 1) the similarity between the Representative Agent New Keynesian (RANK) and HANK frameworks depends crucially on the shock being analyzed; and 2) certain important macroeconomic questions concerning economic fluctuations can only be addressed within heterogeneous agent models.

Citation

Kaplan, Greg, and Giovanni L. Violante. 2018. "Microeconomic Heterogeneity and Macroeconomic Shocks." Journal of Economic Perspectives, 32 (3): 167-94. DOI: 10.1257/jep.32.3.167

Additional Materials

JEL Classification

  • D11 Consumer Economics: Theory
  • E12 General Aggregative Models: Keynes; Keynesian; Post-Keynesian
  • E21 Macroeconomics: Consumption; Saving; Wealth
  • E23 Macroeconomics: Production
  • E32 Business Fluctuations; Cycles
  • E63 Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
  • G01 Financial Crises
There are no comments for this article.
Login to Comment