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Economic Brief

April 2012, No. 12-04

The Spice of Life: Allowing for Heterogeneity in Macro Models

Kartik B. Athreya and Renee Haltom

Macroeconomic models often make simplifying assumptions that suppress differences between people. Changing these assumptions and allowing for "heterogeneity" can enrich analysis of both observed data and policy tradeoffs. Modern macroeconomics has made significant progress in this area, sometimes significantly altering economists' views and policy prescriptions.

Additional Resources

Atkeson, Andrew, V. V. Chari, and Patrick Kehoe, "Taxing Capital Income: A Bad Idea," Federal Reserve Bank of Minneapolis Quarterly Review, Summer 1999, vol. 23, no. 3, pp. 3–17.

Conesa, Juan Carlos, Sagiri Kitao, and Dirk Krueger, "Taxing Capital? Not a Bad Idea After All!" American Economic Review, March 2009, vol. 99, no. 1, pp. 25–48. (Paper available with subscription.)

Erosa, Andrés, and Martin Gervais, "Optimal Taxation in Life-Cycle Economies," Journal of Economic Theory, August 2002, vol. 105, no. 2, pp. 338–369. (A working paper version is available online.)

Garriga, Carlos, "Optimal Fiscal Policy in Overlapping Generations Models," Universitat de Barcelona Working Papers in Economics No. 66, January 2001.

Guvenen, Fatih, "Macroeconomics with Heterogeneity: A Practical Guide," Federal Reserve Bank of Richmond Economic Quarterly, Third Quarter 2011, vol. 97, no. 3, pp. 255–326.

Hansen, Gary D., and Ayse Imrohoroglu, "The Role of Unemployment Insurance in an Economy with Liquidity Constraints and Moral Hazard," Journal of Political Economy, February 1992, vol. 100, no. 1, pp. 118–142. (A working paper version is available online.)

Huggett, Mark, and Juan Carlos Parra, "How Well Does the U.S. Social Insurance System Provide Social Insurance?" Journal of Political Economy, February 2010, vol. 118, no. 1, pp. 76–112. (A previous version is available online.)

Livshits, Igor, James MacGee, and Michele Tertilt, "Consumer Bankruptcy: A Fresh Start," Federal Reserve Bank of Minneapolis Working Paper No. 617, January 2003.

Nishiyama, Shinichi, and Kent Smetters, "Does Social Security Privatization Produce Efficiency Gains?" Quarterly Journal of Economics, November 2007, vol. 122, no. 4, pp. 1677–1719. (A working paper version is available online.)

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