The Representative Household Assumption Requires sustainable Heterogeneity in Dynamic Models

Taiji Harashima

MPRA Paper from University Library of Munich, Germany

Abstract: The assumption of the representative household defined as the average of all households is impossible in dynamic models if households are heterogeneous in their time preference rates because, as is well known, the most patient household eventually prevails. Because time preference rates are unquestionably heterogeneous across economies and time periods, macroeconomics studies using the representative household assumption in dynamic models are fallacious. I present an alternative definition of the representative household based on the concept of sustainable heterogeneity. By this definition, use of the representative household assumption becomes possible in dynamic models.

Keywords: The representative household; Sustainable heterogeneity; Dynamic models; The rate of time preference; Macroeconomics (search for similar items in EconPapers)
JEL-codes: C60 E10 (search for similar items in EconPapers)
Date: 2014-07-25
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (6)

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