Dynamic Cross Sections and Heterogeneity in Macroeconomics

Introduction

A main challenge for modern macroeconomics is to understand the consequences of the sizeable heterogeneity across households and firms, a feature ignored by textbook representative-agent models. Important questions arise on the role that such heterogeneity plays in the workings of the economy and its ability to respond to shocks in the presence of frictions and lumpy behavior (infrequent large adjustments), as is the case for durable purchases, technology adoption, portfolio adjustments, investment, and price re-setting.

Method Development

We develop new methods to characterize the equilibrium dynamics of rich distributions, for a rigorous understanding of the forces that impinge on the aggregate economic behavior in the presence of realistic heterogeneity. We apply the methods to two sets of macroeconomic problems.

First Application: Mapping Models to Data

1. Economy's Response to Shocks
   For a broad class of models with lumpy behavior, we analyze aggregation and develop methods to identify and quantify the fundamental frictions the agents face. The methods will be used to characterize the economy's response to aggregate shocks and identify the cross-section features that matter (and those that do not) in shaping the aggregate response.

2. Areas of Application
   Applications concern:

   • Investment
   • Labor and housing markets
   • Inequality and growth
   • New-Keynesian models

Second Application: Dynamic Strategic Complementarities

A rigorous analysis of dynamic strategic complementarities and network effects is essential. The dependence of one agent's decision on what other agents do is key in modeling aggregate dynamics and is relevant in reality. For instance, a firm may be slow to react to a shock because other firms have not yet reacted.

To date, there are no results to guide us in the analysis of such complementarities in dynamic models with heterogeneity. Several applications, including the amplification of monetary nonneutrality and the dynamic network effects of introducing, e.g., central bank digital currency, will be explored.