CAREER: Macroeconomic Implications of Microeconomic Heterogeneity

Incorporating microeconomic heterogeneity into macroeconomic models radically changes the understanding of the economy. This project consists of five research questions that examine macroeconomic implications of micro-level heterogeneity by building macroeconomic models that can be tightly connected to data. The first project is on understanding the conduct of monetary policy when the distributive implications of exchange rates is taken into account. The second project focuses on the optimal use of fiscal and monetary policy. The third project examines the consumer bankruptcy system. The fourth project explores economic adjustments to shifts in the sectoral composition of workforce. The fifth project investigates the recent decline in the employment of the young workforce by gender and skill group. The educational component of the project convenes workshops with graduate students to teach frontier research on solution methods for heterogeneous-agent models. The findings from these research projects will have broad implications for macroeconomic policy.

The proposal consists of five projects that use general equilibrium models with heterogeneous agents calibrated to micro data. The first project introduces a Heterogenous-Agent New Keynesian model of a small open economy. In the model, exchange rate depreciations increase import prices and lower real income, which can in turn lower domestic output and employment. This is a contractionary effect absent in standard models with profound implications for the transmission of monetary policy. The second project provides a general method to solve for the optimal policy response to aggregate shocks in heterogeneous-agent economies. The third project studies the automatic stabilizer role of the consumer bankruptcy system in a model in which consumers face incomplete markets with an option to default on their debts. The fourth project builds a dynamic model of labor supply with adjustment costs to study the effects of sectoral demand shocks. The fifth project uses a model of skill acquisition with heterogeneity in ability to understand the observed changes over time in the elasticity of labor supply of the workforce by gender and skill group.