Essays On Heterogeneity And Macroeconomics

"The first chapter of this dissertation is based on the observation that during the past 50 years, the US economy has been characterized by a rapid decline of labor unions and a substantial rise in wage inequality. The chapter proposes that the rise in the skill premium in the non-union sector, for instance, due to technical change, can potentially explain these trends. Based on the premise that labor unions compress wages between skilled and unskilled workers, a larger skill premium encourages skilled workers to withdraw from the union. If this is accompanied by a fall in the productivity of unskilled workers, firms become more reluctant to hire the relatively expensive union workers, reinforcing the decline in the unionization rate. To evaluate this hypothesis, we develop a macroeconomic model of endogenous union membership with heterogenous agents, where union members are selected from the middle of the skill distribution and have significant wage gains that are decreasing in skill, consistent with US evidence. The model predicts that the rise in skill prices in the non-union sector explains 30-60% of the decline in the unionization rate. It was argued that the declining union activity contributed to the rise in wage inequality by changing the labor force composition. We find this effect to be much smaller due to selection into union jobs. In the second chapter, I investigate the role of heterogeneity and misaggregation in explaning the empirically missing correlations between the relative consumption and real exchange rates between countries, referred to as the Backus-Smith puzzle. I construct a two-country general-equilibrium model with heterogeneous households that choose to consume either an imported good, or its domestic variant. I show that upon aggregation, the corresponding 'representative agent'' acts as if he is subject to taste shocks, which works towards weakening the tight link between relative prices and quantities. The model therefore constitutes a microfoundation for what shows up as taste shocks in the data. I argue that the missing correlations could be an artifact of heterogeneity"--Page v-vi.

This dissertation consists of two chapters that explore how micro-level heterogeneity helps us understand the dynamics of macroeconomic variables. Chapter 2 shows that the evolving likelihood of marriage and divorce is an essential factor in accounting for the changes in housing decisions over time in the United States. I build and estimate a life-cycle model of single and married households who face exogenous age-dependent marital transition shocks and then conduct a decomposition analysis between 1970 and 1995. The results show that household formation shocks could account for about 30% of the increase in the single's homeownership rate and play a crucial role in generating the observed sign of change in portfolio share of married households. The extended analysis on recent years after 1995 shows that the continuing decrease in marriage prospects contributed to push up the single's homeownership rate during the housing boom in the mid 2000s. Chapter 3 develops a state-space model with a state-transition equation that takes the form of a functional vector autoregression and stacks macroeconomic aggregates and a cross-sectional density. The measurement equation captures the error in estimating log densities from repeated cross-sectional samples. The log densities and the transition kernels in the law of motion of the states are approximated by sieves, which leads to a finite-dimensional representation in terms of macroeconomic aggregates and sieve coefficents. We illustrate how the model works based on the simulation of the Krusell-Smith economy and conduct an empirical analysis on the joint dynamics of technology shocks, per capita GDP, employment rates, and the earnings distribution.

It is now recognized that the heterogeneity of economic agents plays a crucial role in understanding the fluctuations of an economy. The different chapters of my thesis serve the same question: How does heterogeneity changes the way economic policies should be conducted? Today, heterogeneous-agent macroeconomics is developing in several directions, each shedding different light on the problems we face as economists. My thesis is at the confluence of the different facets of this field. The first chapter of my thesis, participates in the heterogeneous agent macroeconomics that derives analytical solutions in reduced-heterogeneity models. I study how governments should increase or decrease taxes on firms over the business cycle. I show that taking into account firms heterogeneity greatly changes tax policy recommendations. The second chapter of my thesis is part of quantitative heterogeneous agent macroeconomics. We study whether monetary policy should use its ability to redistribute wealth among heterogenous households to achieve its objectives. The third chapter of my thesis participates in field that uses micro data to understand macroeconomics and to design public policies. I estimate firms' propensities to invest to better understand how economic policies can vary firms' investment by varying their income.