REQUIEM FOR THE REPRESENTATIVE CONSUMER? AGGREGATE IMPLICATIONS OF MICROECONOMIC CONSUMPTION BEHAVIOR

Christopher Carroll

No 320, Computing in Economics and Finance 2000 from Society for Computational Economics

Abstract: Macroeconomists pursuing microfoundations for aggregate consumption have generally adopted one of two approaches: either to model microeconomic consumption behavior carefully and then to aggregate, or to thoroughly understand the behavior of a `representative consumer' in general equilibrium, then to introduce microeconomic risk and heterogeneity. The broad conclusion from the `bottom up' approach has been that precautionary saving and microeconomic heterogeneity can profoundly change behavior (Stephen P. Zeldes (1989); Angus S. Deaton (1991); Christopher D. Carroll (1992)). The broad conclusion from the `top down' approach has been that precautionary saving is of little importance in determining the aggregate capital stock (S. Rao Aiyagari (1994); Per Krusell and Anthony A. Smith (1998)), leading some economists to conclude that heterogeneity is unimportant for macroeconomic purposes. This paper shows that while general equilibrium effects do imply that the aggregate magnitude of precautionary saving is modest, nevertheless when a model with uninsurable idiosyncratic risk is modified so that it can match the key micro facts, it produces behavior very different in important respects from that produced by the representative agent economy. This leads to the conclusion that for many purposes, the representative consumer model should be abandoned in favor of a model which matches key microeconomic facts.

Date: 2000-07-05
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Journal Article: Requiem for the Representative Consumer? Aggregate Implications of Microeconomic Consumption Behavior (2000)
Software Item: Mathematica code for Requiem for the Representative Consumer? (2000)
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