Heterogeneous Actors in Heterogeneous Countries

 

 

Three defining economic phenomena of the last 30 years are (1) the evolution of inequality both within and across countries, (2) the massive expansion of capital flows following financial liberalisation, and (3) the secular decline of real interest rates common, to varying degrees, across advanced economies.

 

The phenomena all relate to heterogeneity along different dimensions. My proposed research will uniquely explore how these phenomena are related to each other through heterogeneity. These links have been missed by the existing literature because of the absence of quantitative international macroeconomic models with heterogeneous agents that capture the effect of within-country heterogeneity on across country developments. "Heterogeneous Agents in Heterogeneous Countries" will address this key omission. Consisting of five novel projects across four connected Themes, this research agenda will address questions on how heterogeneity of households and countries explains the important relations between the three phenomena.

 

How does heterogeneity, both within and across countries, determine aggregate macroeconomic variables, such as the current account balance, Gross Domestic Product and real interest rates? My agenda tackles this question empirically and theoretically, comprising of five projects divided into four themes. The study of Heterogeneous Agents in Heterogeneous Countries is the common thread linking them all.

The big question of my proposal is how the combination of heterogeneity of households and countries affects macroeconomic variables. This question is divided in four Themes and five projects:

  • Theme I will examine empirically the relationship between within country household inequality and across-country inequality.
  • Theme II aims to introduce household and country heterogeneity in macroeconomic models to study the direction and magnitude of international capital flow among advanced and emerging market economies.
  • Theme III studies how these two sources of heterogeneity affect the decline in the interest rates around the world and what policies can be implemented to stop this decline.
  • Theme IV shows how household and country heterogeneity can explain easily and intuitively many unsolved puzzles in international macroeconomics.

The richness of the data and the models make this research program highly ambitious, but the importance of the questions it addresses imply an extremely high return.

 

 

The research project is supported by the UKRI Frontier Research Guarantee scheme