New Horizons in Macroeconomics with Heterogeneous Agents

• Applicant: Dr. Gregor Böhl
• Subject Area: Economic Theory ; Statistics and Econometrics ; Economic Policy, Applied Economics
• Term: since 2021
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 441540692

This research proposal aims to develop advanced Heterogeneous Agents New Keynesian (HANK) models in order to analyze their implications for a series of fundamental research questions associated with current economic key challenges. The first focus lies on studying the interaction of macroeconomic aggregates with non-trivial labor markets, and the respective consequences for the design of economic policy. The second focus is to analyze the implications of endogenous money creation for the conduct of monetary policy.HANK models are a novel class of models that integrate agent heterogeneity into the New Keynesian framework, which offers insights into the distributional effects of economic shocks and policies and, in turn, enables to study how agent heterogeneity feeds back into macroeconomic aggregates. In this regard, they feature a series of new channels, combining our understanding of the micro- and macroeconomic level. The use of HANK models is non-trivial due to a number of technical challenges.The proposal outlines four main objectives. Firstly, it aims to broaden our understanding of various macroeconomic concepts by enhancing the HANK model with a realistic labor market. The focus of this objective is threefold: First, it lies on studying the economic implications of labor shortages, which describes a situation when the economy operates close to its capacity constraint. A second focus involves the macroeconomic analysis of policies for managing aggregate demand and employment, including minimum wages, unemployment benefits, and lump-sum transfers. The third focus is to examine how various social policies either amplify or dampen other economic shocks throughout the business cycleThe second objective of this proposal is to investigate the interaction of households with endogenous money creation through the banking sector in HANK models, exploring implications for the implementation of monetary policy. The central goal is to study the state-dependency of the effects of different forms of monetary policy impulses, such as open market operations, reserve rate policy, or helicopter money.Given the complexity of solving and simulating HANK models, technical innovations are necessary to address these objectives. The third objective is thus to develop methods to enable nonlinear solutions for heterogeneous agent models with sophisticated labor markets. Another distinct challenge is the empirical validation and parameterization of HANK models. Therefore, the fourth objective is the adaptation of state-of-the-art sampling technology to estimate medium-scale HANK models in order to use broader empirical evidence for their parameterization.Overall, This research proposal aims to enhance our understanding of macroeconomic and distributional dynamics while developing methodological innovations for studying HANK models, contributing to more effective policy formulation amid current economic challenges.

• DFG Programme: Research Grants