Heterogeneity, Household Behavior, and the Transmission of Aggregate Shocks

Most of the models used to study monetary and fiscal policy abstract away from inequality and assume that households are rational and perfectly informed about the state of the economy. Considering households that are heterogenous with respect to their consumption, income, wealth, and information sets imposes challenges in modeling. This research develops a codebase in modelling heterogenous decision makers using recent advances in theory and computation. The developed toolkit will include codes, extensive documentation in the form of notebooks, as well as teaching materials. The developed codebase will provide researchers and policy makers a useful toolkit in considering heterogenous households by simplifying the computation and estimation of complex macroeconomic models.

This research on heterogenous agent models leverages new advances on the computation of equilibria in sequence space by jointly solving the equations characterizing equilibrium across all periods for time paths of the unknowns, given initial conditions on the distribution and other states. For models that are linearized to first order with respect to aggregates, the sequence and the state space approaches deliver the same impulse responses, but the sequence space has computational advantages for heterogeneous-agent models: it allows for a wider class of shocks, is easily scalable, and can achieve large speed gains. The developed toolkit will require as input the equations characterizing equilibrium, including specification of heterogeneous-agent "blocks". The toolkit will then automatically perform computation of steady state and transition dynamics for given shocks. Extensions will allow estimation as well as computation of optimal policy.