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Macroeconomics and Heterogeneity

Paper Session

Friday, Jan. 4, 2019 10:15 AM - 12:15 PM

Hilton Atlanta, 403
Hosted By: Society for Economic Dynamics
  • Chair: Adrien Auclert, Stanford University

The Interest Rate Elasticity of Durable Demand: Measurement and Implications

Alisdair McKay
,
Federal Reserve Bank of Minneapolis
Johannes Wieland
,
University of California-San Diego

Abstract

In most business cycle models, an aggregate demand shock leads to an endogenous response of interest rates that dampens the general equilibrium response of activity. The strength of this attenuation depends on the elasticity of demand for goods with respect to interest rates. Existing models that include long-lived durable goods imply this elasticity is extremely large. Our first contribution is to measure the interest elasticity of durable demand empirically. Indeed, standard models vastly over-predict its value. We present an augmented model that matches microeconomic durable adjustment frequencies and the aggregate interest elasticity of durable demand with respect to interest rates. Finally, we show that the general equilibrium attenuation of aggregate demand shocks in the modified model is far weaker than standard models imply.

Macroeconomic Effects of Debt Relief: Consumer Bankruptcy Protections in the Great Recession

Adrien Auclert
,
Stanford University
Will Dobbie
,
Princeton University
Paul Goldsmith-Pinkham
,
Federal Reserve Bank of New York

Abstract

This paper uses cross-state variation in bankruptcy homestead exemptions and a general equilibrium model to test whether ex-post debt forgiveness can stabilize macroeconomic activity during a debt-laden recession. We begin by documenting that states with more and less generous bankruptcy exemptions had statistically identical macroeconomic outcomes during the 2001-2007 period. Starting in 2008, however, states with more generous bankruptcy exemptions had significantly smaller declines in local non-tradable employment and larger increases in consumer debt write-downs. We then develop a general equilibrium model that matches these reduced form estimates to recover the aggregate effect of consumer debt forgiveness and conduct policy counterfactuals. Substantial nominal rigidities are required to rationalize our empirical estimate of a cross-state debt relief multiplier of around 2 for nontradable employment. Our model suggests that debt relief in affected regions boosted employment everywhere because of tradable employment linkages. These results are consistent with the hypothesis that ex-post debt forgiveness can substitute for monetary policy in reducing the real impact of financial crises.

Accounting for Heterogeneity

David Berger
,
Northwestern University
Luigi Bocola
,
Stanford University
Alessandro Dovis
,
University of Pennsylvania

Abstract

One “industry standard” methodology for model evaluation in Macroeconomics is Business Cycle Accounting (Chari, Kehoe and McGrattan, 2008). In this paper, we generalize this framework to allow for an analysis of heterogeneity, where distortions are introduced via individual specific wedges. We use this framework to explore the role of market incompleteness for business cycle fluctuations.

Income and Wealth Distribution in Macroeconomics: A Continuous-Time Approach

Benjamin Moll
,
Princeton University
Yves Achdou
,
Paris Diderot University
Jiequn Han
,
Princeton University
Jean-Michel Lasry
,
Paris Dauphine University
Pierre-Louis Lions
,
College of France

Abstract

We recast the Aiyagari-Bewley-Huggett model of income and wealth distribution in continuous time. This workhorse model – as well as heterogeneous agent models more generally – then boils down to a system of partial differential equations, a fact we take advantage of to make two types of contributions. First, a number of new theoretical results: (i) an analytic characterization of the consumption and saving behavior of the poor, particularly their marginal propensities to consume; (ii) a closed-form solution for the wealth distribution in a special case with two income types; (iii) a proof that here is a unique stationary equilibrium if the intertemporal elasticity of substitution is weakly greater than one; (iv) a characterization of “soft” borrowing constraints. Second, we develop a simple, efficient and portable algorithm for numerically solving for equilibria in a wide class of heterogeneous agent models, including – but not limited to – the Aiyagari-Bewley-Huggett model.
JEL Classifications
  • E3 - Prices, Business Fluctuations, and Cycles
  • E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy