Can a Representative-Agent Model Represent a Heterogeneous-Agent Economy

• Main Authors: AN, Sungbae, CHANG, Yongsung, KIM, Sun-Bin
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2009
• Subjects: Macroeconomics
• Online Access: https://ink.library.smu.edu.sg/soe_research/544; https://ink.library.smu.edu.sg/context/soe_research/article/1543/viewcontent/mac.1.2.29.pdf
• Institution: Singapore Management University

Accounting for observed fluctuations in aggregate employment, consumption, and real wage using the optimality conditions of a representative household requires preferences that are incompatible with economic priors. In order to reconcile theory with data, we construct a model with heterogeneous agents whose decisions are difficult to aggregate because of incomplete capital markets and the indivisible nature of labor supply. If we were to explain the model-generated aggregate time series using decisions of a stand-in household, such a household must have a nonconcave or unstable utility as is often found with the aggregate US data.