Abstract
We study a self-reflexive DSGE model with heterogeneous households, aimed at characterising the impact of economic recessions on the different strata of the society. Our framework allows to analyse the combined effect of income inequalities and confidence feedback mediated by heterogeneous social networks. By varying the parameters of the model, we find different crisis typologies: loss of confidence may propagate mostly within high income households, or mostly within low income households, with a rather sharp transition between the two. We find that crises are more severe for segregated networks (where confidence feedback is essentially mediated between agents of the same social class), for which cascading contagion effects are stronger. For the same reason, larger income inequalities tend to reduce, in our model, the probability of global crises. Finally, we are able to reproduce a perhaps counter-intuitive empirical finding: in countries with higher Gini coefficients, the consumption of the lowest income households tends to drop less than that of the highest incomes in crisis times.
Highlights
Dynamic Stochastic General Equilibrium (DSGE) models [1, 2] still constitute the workhorse for monetary policy around the world [3, 4]
Attempts have been made to move away from the “Representative Agent” paradigm, by including different categories of households—hand-to-mouth vs. well-off in TANK (Two-Agent New Keynesian) models [11,12,13,14]—or heterogeneous households with a continuum of possible accumulated wealth, as in HANK (Heterogeneous Agent New Keynesian) models [15,16,17,18,19,20]; see [21] for a different approach leading to emergent heterogeneities
Our starting point is our recent work [27] where we investigated a multi-household DSGE model in which past aggregate consumption impacts the confidence, and consumption propensity, of individual households
Summary
Dynamic Stochastic General Equilibrium (DSGE) models [1, 2] still constitute the workhorse for monetary policy around the world [3, 4]. Attempts have been made to move away from the “Representative Agent” paradigm, by including different categories of households—hand-to-mouth vs well-off in TANK (Two-Agent New Keynesian) models [11,12,13,14]—or heterogeneous households with a continuum of possible accumulated wealth, as in HANK (Heterogeneous Agent New Keynesian) models [15,16,17,18,19,20]; see [21] for a different approach leading to emergent heterogeneities. Our heterogeneities are static (low skill workers do not become high skill workers, and the social network is “frozen”), whereas in HANK models earnings are dynamical variables as agents self-insure against possible loss of wages in the future. The different ingredients of the model are summarized as follows
Sign-in/Register to view highlights & summary Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
