Household heterogeneity in macroeconomic models: A historical perspective

Abstract

In this paper, we trace the rise of heterogeneous household models in mainstream macroeconomics from the turn of the 1980s to the early 2000s, when these models evolved into an identifiable and consistent literature. We show that different communities across the US and Europe considered heterogeneous agents for various reasons and developed models that differed in their theoretical and empirical strategies. Minnesota economists primarily focused on incorporating stochastic heterogeneity into general equilibrium models. Other researchers refined growth models or tried to find alternatives to the permanent income hypothesis, leading them to explore more structural heterogeneity. We also document the computational challenges that some of these communities faced, how they gradually became aware of each other's work, and how they faced criticisms from macro- and microeconomists, many of them trained in European countries and dissatisfied with the theoretical and empirical aggregation strategies underlying these models.