Quantitative effects of heterogeneity in dynamic macroeconomics

Abstract

The thesis studies quantitative implications of the real business cycle models with heterogeneous agents. The questions I ask are: First, Can the studied models not only replicate the aggregate time series facts but also the distributions of individual quantities such as consumption, hours worked, income, wealth observed in the micro data? Second, Does incorporating heterogeneity enhance the aggregate performance of the representative consumer models? To simplify the characterization of the equilibria in the models, I use results from aggregation theory. The thesis is composed of three chapters, each of which can be read independently. A l l chapters are joint with Serguei Maliar. The first chapter analyzes the predictions of a heterogeneous agents version of the model by Kydland and Prescott (1982). I calibrate and solve the model with eight heterogeneous agents to match the aggregate quantities and the distributions of productivity and wealth in the U.S. economy. I find that the model can generate the distributions of consumption and working hours which are consistent with patters observed in the data. I show that incorporating the heterogeneity helps to improve on the model's predictions with respect to labor markets. In particular, unlike a similar representative agent setup, the heterogeneous model can account for the Dunlop-Tarshis observation of weak correlation between productivity and hours worked. The second chapter constructs a heterogeneous agents version of the indivisible labor model by Hansen (1985) with search and home production. I calibrate and solve the model with five agents to replicate aggregate quantities and differences in productivity across agents in the U.S. economy. The model does reasonably well at reproducing cyclical behavior of the macroeconomic aggregates. At the individual level, it can account for the stylized facts that more productive individuals (i) enjoy a higher employment rate, (ii) have a lower volatility of employment, (iii) spend less time working at home. It is important to emphasize that none of the heterogeneous models with home production existing in the literature has been able to explain fact (ii). The third chapter studies distributive dynamics of wealth and income in a heterogeneous agents version of Kydland and Prescott's (1982) model. I show that imder the assumptions of complete markets and Cobb-Douglas preferences, the evolution of wealth and income distributions in the model can be described in terms of aggregate variables and time-invariant agent-specific parameters. This allows me to characterize explicitly the behavior of such inequality measvures as the coefficient of variation of wealth and income over the business cycle. I test the model's implications by using the time series on the U.K. economy. The predictions are in agreement with the data.