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
G. Violante, ”Micro Heterogeneity and Macro Shocks” p. 2 /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
• Why?
1. Making sense of Great Recession needs HA and AD
2. RA model at odds with evidence on consumption behavior
G. Violante, ”Micro Heterogeneity and Macro Shocks” p. 2 /28
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
G. Violante, ”Micro Heterogeneity and Macro Shocks” p. 3 /28
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
G. Violante, ”Micro Heterogeneity and Macro Shocks” p. 3 /28
THE MODEL
G. Violante, ”Micro Heterogeneity and Macro Shocks” p. 4 /28
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
G. Violante, ”Micro Heterogeneity and Macro Shocks” p. 5 /28
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)
G. Violante, ”Micro Heterogeneity and Macro Shocks” p. 5 /28
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
G. Violante, ”Micro Heterogeneity and Macro Shocks” p. 6 /28
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
G. Violante, ”Micro Heterogeneity and Macro Shocks” p. 7 /28
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%
G. Violante, ”Micro Heterogeneity and Macro Shocks” p. 8 /28
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
G. Violante, ”Micro Heterogeneity and Macro Shocks” p. 9 /28
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
G. Violante, ”Micro Heterogeneity and Macro Shocks” p. 9 /28
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
• Reaction of fiscal side to shock (Kaplan-Moll-Violante)
◮ Timing and distribution of fiscal adjustment (RE fails)
G. Violante, ”Micro Heterogeneity and Macro Shocks” p. 9 /28
RA-HA COMPARISON
G. Violante, ”Micro Heterogeneity and Macro Shocks” p. 10 /28
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
G. Violante, ”Micro Heterogeneity and Macro Shocks” p. 11 /28
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
G. Violante, ”Micro Heterogeneity and Macro Shocks” p. 12 /28
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
G. Violante, ”Micro Heterogeneity and Macro Shocks” p. 13 /28
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
G. Violante, ”Micro Heterogeneity and Macro Shocks” p. 14 /28
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
G. Violante, ”Micro Heterogeneity and Macro Shocks” p. 15 /28
QUESTIONS REQUIRING HA
G. Violante, ”Micro Heterogeneity and Macro Shocks” p. 16 /28
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)
G. Violante, ”Micro Heterogeneity and Macro Shocks” p. 17 /28
Questions that require heterogeneity
1. Microfoundation for demand/preference shock in RANK
• Shock to credit limits (e.g., Guerrieri-Lorenzoni)
• Rise in uninsurable risk (e.g., Den Haan-Rendahl-Riegler)
2. Transmission mechanism of shock across distribution
• Useful to compare model with micro data
G. Violante, ”Micro Heterogeneity and Macro Shocks” p. 18 /28
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
G. Violante, ”Micro Heterogeneity and Macro Shocks” p. 19 /28
Identification of source of negative demand shock
0 20 40 60 80 100-2
0
2
4
6
8
10
G. Violante, ”Micro Heterogeneity and Macro Shocks” p. 20 /28
Questions that require heterogeneity
1. Microfoundation for demand/preference shock in RANK
• Shock to credit limits (e.g., Guerrieri-Lorenzoni)
• Rise in uninsurable risk (e.g., Den Haan-Rendahl-Riegler)
2. Transmission mechanism of shock across distribution
• Useful to compare model with micro data
3. Distributional implications of aggregate shocks
• Welfare consequences across households
G. Violante, ”Micro Heterogeneity and Macro Shocks” p. 21 /28
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
G. Violante, ”Micro Heterogeneity and Macro Shocks” p. 22 /28
TAKING STOCK
G. Violante, ”Micro Heterogeneity and Macro Shocks” p. 23 /28
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
G. Violante, ”Micro Heterogeneity and Macro Shocks” p. 24 /28
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
2. HA model allows deeper foundation of some macro shocks
G. Violante, ”Micro Heterogeneity and Macro Shocks” p. 24 /28
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
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
G. Violante, ”Micro Heterogeneity and Macro Shocks” p. 24 /28
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
G. Violante, ”Micro Heterogeneity and Macro Shocks” p. 25 /28
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
G. Violante, ”Micro Heterogeneity and Macro Shocks” p. 26 /28
Thanks!
G. Violante, ”Micro Heterogeneity and Macro Shocks” p. 27 /28
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
G. Violante, ”Micro Heterogeneity and Macro Shocks” p. 28 /28