Can a Representative-Agent Model Represent a Heterogeneous-Agent Economy

Sungbae An · Yongsung Chang · Sun-Bin Kim

48 citations0/0 files storedAmerican Economic Journal Macroeconomics

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Economic theories and models Monetary Policy and Economic Impact Economic Theory and Policy

Abstract

Accounting for observed fluctuations in aggregate employment, consumption, and real wage using the optimality conditions of a representative household requires preferences that are incompatible with economic priors. In order to reconcile theory with data, we construct a model with heterogeneous agents whose decisions are difficult to aggregate because of incomplete capital markets and the indivisible nature of labor supply. If we were to explain the model-generated aggregate time series using decisions of a stand-in household, such a household must have a nonconcave or unstable utility as is often found with the aggregate US data. (JEL E13, E24)

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References

1982Time to Build and Aggregate Fluctuations 1994Uninsured Idiosyncratic Risk and Aggregate Saving 1998Income and Wealth Heterogeneity in the Macroeconomy 1988Production, growth and business cycles 1988Indivisible labor, lotteries and equilibrium 2007Business Cycle Accounting 1981An Empirical Model of Labor Supply in a Life-Cycle Setting 1980An Empirical Model of Labor Supply in a Life Cycle Setting

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