DSGE models with heterogeneous economic agents: A new notion at the characteristics of the functioning of the economy

Abstract

In the article we systematize foreign experience in building dynamic stochastic general equilibrium models (DSGE) with heterogeneous economic agents. The advantages of models of this class relative to simpler specifications are analyzed while studying a few fundamental topics: starting with the reaction of aggregates in models where agents face idiosyncratic income risk, monetary and fiscal policies, and ending with models with entrepreneurship, the problem of the zero lower bound, and models of the social security system. Models with heterogeneous economic agents often give a radically different look at many well studied things in simpler models. They allow more accurate reproduction of empirical data and relationships, for example cross-sectional distributions of income and wealth. Therefore, it is very promising to study these models.