Implications of Wealth Heterogeneity For Macroeconomics

Christopher Carroll

Economics Working Paper Archive from The Johns Hopkins University,Department of Economics

Abstract: Today�s dominant strain of macroeconomic models supposes that aggregate consumption can be understood by assuming the existence of a �representative agent� whose behavior rationalizes observed outcomes. But representative agent models yield embarrassingly implausible (and empirically inaccurate) descriptions of consumption behavior. When push comes to shove, real-world forecasters (including those at the Fed) properly disregard these implications. As a result, consumption forecasting remains very much a seat-of-the-pants enterprise. I will argue that if the representative agent assumption is replaced with a model that generates wealth heterogeneity that matches the empirical data, the improved model can provide a sensible analysis of economic questions like "What might the consumption response be to economic stimulus payments?"

Date: 2012-05
New Economics Papers: this item is included in nep-for and nep-mac
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