Staff Report 420

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Quantitative Macroeconomics with Heterogeneous Households

Jonathan Heathcote - Senior Research Economist
Kjetil Storesletten
Giovanni L. Violante

Published February 5, 2009

Abstract
Macroeconomics is evolving from the study of aggregate dynamics to the study of the dynamics of the entire equilibrium distribution of allocations across individual economic actors. This article reviews the quantitative macroeconomic literature that focuses on household heterogeneity, with a special emphasis on the “standard” incomplete markets model. We organize the vast literature according to three themes that are central to understanding how inequality matters for macroeconomics. First, what are the most important sources of individual risk and cross-sectional heterogeneity? Second, what are individuals’ key channels of insurance? Third, how does idiosyncratic risk interact with aggregate risk?


Published In: Annual Review of Economics (Vol. 1, No. 1, 2009, pp. 315-354)

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