Modern macroeconomic theory relies on microfoundations: the behavior of various economic agents (consumers, firms, etc.) is described from first microeconomic principles, and markets are described explicitly, so that welfare analysis can be carried out using standard methods. However, the vast majority of models used in practice (e.g., at central banks) to study applied questions builds on the representative-agent framework, i.e., these models abstract from the reality of consumer heterogeneity. Similarly, they treat firms as largely identical. These assumptions were natural and attractive simplifications during the development of modern macroeconomic theory. A large number of theoretical and empirical investigations, however, have cast doubt on these simplifications and instead study the implications of heterogeneity among consumers (and firms) along with incom- plete insurance markets. The development of this alternative modelling framework began a quarter-century ago and has continued unabated through many refinements and extensions. The resulting models can now be implemented quantitatively and compared systematically to the representative-agent model. Several such comparisons in recent years argue, for example, that the recent financial crisis and ensuing Great Recession cannot be well understood without a heterogeneous-consumer perspective.
This course will review these theoretical developments, beginning with a core model and building up toward recent advanced models aimed at full-fledged quantitative analysis. Because quantitative heterogeneous-agent modelling requires some investment in computational methods, the course will also briefly describe such methods. Throughout this course, the participants will thus accumulate some basic theoretical knowledge as well as programming skills and then implement these in order to analyze some simple examples. This part of the course will require students to carry out some hands-on computation using Matlab code provided during the course. The course will also cover the empirical literature on inequality in income and wealth, partly to examine causes of inequality and partly in order to be able to calibrate, or estimate, key parameters in the heterogeneous-consumer model. This part of the course will also briefly discuss Thomas Piketty’s recent work on trends in, and causes behind, inequality.