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Macroeconomics and Heterogeneity
Friday, Jan. 4, 2019
10:15 AM - 12:15 PM
Society for Economic Dynamics
The Interest Rate Elasticity of Durable Demand: Measurement and Implications
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
We combine cross-state variation in bankruptcy exemptions with a general equilibrium model to show that ex-post debt forgiveness can stabilize macroeconomic activity during a debt-driven 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 compared to states with less generous exemptions. We then develop a general equilibrium model to recover the aggregate effect of consumer debt forgiveness and conduct policy counterfactuals. The model yields three key results. First, substantial nominal rigidities are required to rationalize the reduced form estimates. Second, with monetary policy at the zero lower bound, traded good demand spillovers from more generous to less generous states boosted employment everywhere. Finally, the debt forgiveness provided during the Great Recession increased total employment by roughly 1.5 percent.
Accounting for Heterogeneity
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
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.
E3 - Prices, Business Fluctuations, and Cycles
E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy