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Heterogeneity in macroeconomic models: A review of theory and computation

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  • Julien Pascal

Abstract

This paper reviews the literature examining the consequences of heterogeneity in macroeconomic modeling, especially within the context of monetary and fiscal policy transmission. This review reveals that heterogeneity can significantly alter the transmission mechanisms of monetary policy in macroeconomic models and suggests possible advantages from collaboration between fiscal and monetary policies. The paper also provides a critical evaluation of various analytical and numerical methods to solve macroeconomic models with heterogeneity, underscoring the need for a careful methodological choice based on specific circumstances.

Suggested Citation

  • Julien Pascal, 2024. "Heterogeneity in macroeconomic models: A review of theory and computation," BCL working papers 185, Central Bank of Luxembourg.
    • Handle: RePEc:bcl:bclwop:bclwp185
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    File URL: https://www.bcl.lu/en/publications/Working-papers/185/BCLWP185.pdf
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    References listed on IDEAS

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    1. François Le Grand & Xavier Ragot, 2022. "Managing Inequality Over Business Cycles: Optimal Policies With Heterogeneous Agents And Aggregate Shocks," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 63(1), pages 511-540, February.
    2. Santos, Manuel S, 1991. "Smoothness of the Policy Function in Discrete Time Economic Models," Econometrica, Econometric Society, vol. 59(5), pages 1365-1382, September.
    3. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
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    6. Michele Lenza & Jiri Slacalek, 2024. "How does monetary policy affect income and wealth inequality? Evidence from quantitative easing in the euro area," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 39(5), pages 746-765, August.
    7. Ben Moll, 2020. "The Research Agenda: Ben Moll on the Rich Interactions between Inequality and the Macroeconomy," EconomicDynamics Newsletter, Review of Economic Dynamics, vol. 21(2), November.
    8. Krusell, Per & Mukoyama, Toshihiko & Smith Jr., Anthony A., 2011. "Asset prices in a Huggett economy," Journal of Economic Theory, Elsevier, vol. 146(3), pages 812-844, May.
    9. Frank Smets & Rafael Wouters, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," American Economic Review, American Economic Association, vol. 97(3), pages 586-606, June.
    10. Felipe Alves & Greg Kaplan & Benjamin Moll & Giovanni L. Violante, 2020. "A Further Look at the Propagation of Monetary Policy Shocks in HANK," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(S2), pages 521-559, December.
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    12. Thomas Winberry, 2018. "A method for solving and estimating heterogeneous agent macro models," Quantitative Economics, Econometric Society, vol. 9(3), pages 1123-1151, November.
    13. Kanishka Misra & Paolo Surico, 2014. "Consumption, Income Changes, and Heterogeneity: Evidence from Two Fiscal Stimulus Programs," American Economic Journal: Macroeconomics, American Economic Association, vol. 6(4), pages 84-106, October.
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    More about this item

    Keywords

    Literature review; Heterogeneity; Monetary Policy; Fiscal Policy; Macroeconomic Modeling; HANK model.;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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