Microeconomic Heterogeneity and Macroeconomic Shocks

Microeconomic Heterogeneity

and Macroeconomic Shocks

Greg Kaplan

University of Chicago

Gianluca Violante

Princeton University

AFR Summer Institute of Economics and Finance

Special issue of JEP on “The State of Macroeconomics a Decade After the Crisis”

G. Violante, ”Micro Heterogeneity and Macro Shocks” p. 1 /28

Background

• Recent explosion of HANK models in the last five years

• HA: household uninsurable income risk

• NK: nominal rigidities, Taylor rule

• Examples:

◮ Acharya-Dogra, Auclert, Auclert-Rognlie, Bayer-Pham-Luetticke-Tjaden,

Bilbiie, De Bortoli-Gali, Bhandari-Evans-Golosov-Sargent, Den

Haan-Rendahl-Riegler, Galo-Thomas, Gornemann-Kuester-Nakajima,

Guerrieri-Lorenzoni, Hagedorn, Hagedorn-Manovskii-Mitman,

Kaplan-Moll-Violante, LeGrand-Ragot, Luettecke, McKay-Reis,

McKay-Nakamura-Steinsson, Oh-Reis, Ravn-Sterk, Werning, Wong


Background

• Recent explosion of HANK models in the last five years

• HA: household uninsurable income risk

• NK: nominal rigidities, Taylor rule

• Examples:

◮ Acharya-Dogra, Auclert, Auclert-Rognlie, Bayer-Pham-Luetticke-Tjaden,

Bilbiie, De Bortoli-Gali, Bhandari-Evans-Golosov-Sargent, Den

Haan-Rendahl-Riegler, Galo-Thomas, Gornemann-Kuester-Nakajima,

Guerrieri-Lorenzoni, Hagedorn, Hagedorn-Manovskii-Mitman,

Kaplan-Moll-Violante, LeGrand-Ragot, Luettecke, McKay-Reis,

McKay-Nakamura-Steinsson, Oh-Reis, Ravn-Sterk, Werning, Wong

• Why?

1. Making sense of Great Recession needs HA and AD

2. RA model at odds with evidence on consumption behavior


Outline for Today

1. Does micro heterogeneity ‘matter’ for the response of macro

aggregates to macro shocks?

• Matters I: alters aggregate IRF to shocks

• Matters II: alters its transmission mechanism


Outline for Today

1. Does micro heterogeneity ‘matter’ for the response of macro

aggregates to macro shocks?

• Matters I: alters aggregate IRF to shocks

• Matters II: alters its transmission mechanism

2. Macro questions that need heterogeneity for coherent analysis

• Micro-foundation for aggregate demand shock,e.g. credit limits, uninsurable risk

• Identification of aggregate shocks through cross-section

• Effects of aggregate shocks on inequality


THE MODEL


HANK as in Kaplan-Moll-Violante (2017)

• Continuum of households, each solving the problem:

maxct,dt

E0

∫

∞

0

e−ρt

[

log ct − φh1+1/ηt

1 + 1/η

]

dt

s.t.

bt = (1− τt)wtztht + rbt (bt)bt + Tt − dt − χ(dt, at)− ct

at = rat at + dt

bt ≥ −b, at ≥ 0


HANK as in Kaplan-Moll-Violante (2017)

• Continuum of households, each solving the problem:

maxct,dt

E0

∫

∞

0

e−ρt

[

log ct − φh1+1/ηt

1 + 1/η

]

dt

s.t.

bt = (1− τt)wtztht + rbt (bt)bt + Tt − dt − χ(dt, at)− ct

at = rat at + dt

bt ≥ −b, at ≥ 0

RANK: RA counterpart with zit = Z (same 2-asset structure)


Remaining model ingredients

Illiquid assets: a = k + qs

• No arbitrage: rk − δ = Π+qq := ra

Production

• Monopolistic intermediate-good producers → final good

• Rent capital and labor services from households

• Quadratic price adjustment costs à la Rotemberg (1982)

Fiscal Authority

• Issues liquid debt (Bg), spends (G), taxes and transfers (T )

Monetary Authority

• Sets nominal rate on liquid assets based on a Taylor rule


Summary of market clearing conditions

• Liquid asset market

Bh +Bg = 0

• Illiquid asset market

A = K + q

• Labor market

N =

∫

zh(a, b, z)dµ

• Goods market:

Y = C + I +G+ transaction, price adj., and borrowing costs


Model liquid and illiquid wealth distributions

• Top: very skewed wealth distribution (Gini ≈ 0.8)

• Bottom: share of hand-to-mouth households as in the data (≈1/3)

• MPC: DATA: 20% RANK: 0.5% HANK-1: 5% HANK-2: 15%


What determines amplification in HANK

• Correlation btw MPC and ∆y (Auclert, Bilbiie, Broer et al.)

◮ Incidence of fluctuations in labor demand across population

◮ Distribution of profits: equity market vs. lump-sum rebate






• Cyclicality of precautionary saving (Werning)

◮ Cyclicality of uninsurable labor income risk

◮ Dependence of borrowing limits on aggregate conditions






• Cyclicality of precautionary saving (Werning)

◮ Cyclicality of uninsurable labor income risk

◮ Dependence of borrowing limits on aggregate conditions

• Reaction of fiscal side to shock (Kaplan-Moll-Violante)

◮ Timing and distribution of fiscal adjustment (RE fails)


RA-HA COMPARISON


Equivalence between HA and RA Models

• IRF of C to a shock η in model m ∈ {RA,HA}

dCmt =

∫

i

dcmit di

• Non-equivalence: different IRF

dCHAt 6= dCRA

t ∀ t ≥ 0

• Weak equivalence: same IRF

dCHAt = dCRA

t ∀ t ≥ 0

• Strong equivalence: same IRF + same transmission mechanism


Demand shock: strong equivalence

5 10 15 20-0.8

-0.6

-0.4

-0.2

0

0.2

5 10 15 20-0.8

-0.6

-0.4

-0.2

0

0.2

5 10 15 20-0.8

-0.6

-0.4

-0.2

0

0.2


TFP shock: weak equivalence

5 10 15 20

-0.8

-0.6

-0.4

-0.2

0

5 10 15 20

-0.8

-0.6

-0.4

-0.2

0

5 10 15 20

-0.8

-0.6

-0.4

-0.2

0


Monetary shock: non equivalence

5 10 15 20

-0.8

-0.6

-0.4

-0.2

0

5 10 15 20

-0.8

-0.6

-0.4

-0.2

0

5 10 15 20

-0.8

-0.6

-0.4

-0.2

0


Fiscal Transfer Stimulus: Stark Non Equivalence

-2 -1 0 1 2 3 4 5-5

0

5

10

15

20

25

30

35

• Nonlinearity: εC,T falls with |∆T |

• Sign asymmetry: εC,T larger for negative ∆T

• GE amplifies T stimulus, until inflationary effects (↑ rb) dominate


QUESTIONS REQUIRING HA


Questions that require heterogeneity

1. Microfoundation for demand/preference shock

• Shock to credit limits (e.g., Guerrieri-Lorenzoni)

• Rise in uninsurable risk (e.g., Den Haan-Rendahl-Riegler)



1. Microfoundation for demand/preference shock in RANK



2. Transmission mechanism of shock across distribution

• Useful to compare model with micro data


Effect of monetary shock across the distribution

0 20 40 60 80 100

0

0.2

0.4

0.6

0.8

1

0 10 20 30 40 50 60 70 80 90 100

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

Total Effect Decomposition


Identification of source of negative demand shock

0 20 40 60 80 100-2

0

2

4

6

8

10



1. Microfoundation for demand/preference shock in RANK



2. Transmission mechanism of shock across distribution

• Useful to compare model with micro data

3. Distributional implications of aggregate shocks

• Welfare consequences across households


Distributional implications of monetary tightening

2 4 6 8 10 12 14 16 18 20-0.7

-0.6

-0.5

-0.4

-0.3

-0.2

-0.1

0

0.1

De

via

tio

n (

%)

• Rich households: positive direct income effect (higher rb)

• Poor households: negative indirect effect (lower w)

• Consistent with Coibion et al. (2015): ↑ Gini, but small effect


TAKING STOCK


What we learned

1. Does micro heterogeneity matter for macro dynamics?

• It depends on some unavoidable modeling choices

• It also depends on the aggregate shock


What we learned




2. HA model allows deeper foundation of some macro shocks


What we learned




2. HA model allows deeper foundation of some macro shocks

3. Heterogeneous consequences of aggregate shocks, useful for:

• Identifying the transmission of shocks and its origins

• Studying impact of aggregate shocks on household inequality


Looking ahead

Some directions where HANK models should be extended:

1. Gross and nominal asset positions: Fischer effect

2. Time-varying risk premia: asset price dynamics

3. Alternative sources of AD effects: search in product markets

4. Optimal stabilization policy: redistribution implications


Implications for Central Banks and Monetary Policy

• Different transmission mechanism of monetary policy

◮ Household labor income stimulus more important

◮ Intertemporal substitution less important

• Different focus for effects of central bank actions

◮ How labor market operates

◮ How household balance sheets affect transmission

• Central bank actions have distributional consequences

◮ Cannot ignore, must have models to understand them


Thanks!


Four key aspects of parameterization

1. Measurement and partition of asset categories into:

• Liquid (cash, bank accounts + government/corporate bonds)

• Illiquid (equity, housing)

2. Income process with leptokurtic income changes

• Nature of earnings risk affects household portfolio

3. Adjustment cost function and discount rate

• Match mean liquid/illiquid wealth and fraction of HtM

4. Production side: standard calibration of NK models


Documents

Microeconomic Heterogeneity and Macroeconomic Shocks