Inequality in 3D-measurement and implications for macroeconomic theory (3D-In-Macro)

European Research Council (ERC) Starting Grant 2020 – 2025

Principal Investigator: Andreas Fagereng

Project detail

In macroeconomics, much theoretical progress has been made in understanding when distributions matter for aggregates. Newer heterogeneous agent models deliver strikingly different implications for monetary and fiscal policies than what the traditional representative agent models do and also allow us to study the distributional implications of different policies across households.

In principle, this class of models can incorporate the potentially rich interactions between inequality and the macroeconomy: on the one hand, inequality shapes macroeconomic aggregates; on the other hand, macroeconomic shocks and policies affect inequality. However, absent precise micro-level facts it is difficult to establish which of the potential mechanisms highlighted by these models are the most important in reality.

In the project, we will contribute toward a better understanding of inequality and its implications by carefully measuring economic inequality and its dynamics. Our exercise will be performed in a unique setting, the Norwegian economy, utilizing novel sources of micro data. The empirical efforts will be disciplined by these recent developments in modeling macroeconomic phenomena with microeconomic heterogeneity.

Our overarching motivation is to quantify the type of micro heterogeneity that matters for macroeconomic theory and thereby inform the development of current and future macroeconomic models. The novel insights we aim to provide could lead to substantial improvements in both fiscal and monetary policy tools. Furthermore, a better understanding of the forces behind growing inequality will inform the current debates on this issue and provide important lessons to policymakers now and in the future.

The project will focus the research efforts along three main arches. Firstly, we will map out the dynamics and persistence of inequality over time utilizing long panel data series. Secondly, we will focus on intergenerational aspects of inequality, highlighting the family or dynastic perspective. This includes studying the role of dynastic risk management and the role of bequests. In the last part, we will assess the aggregate implications of inequality and heterogeneity and use both empirical and theoretical insights from recent research to discipline state-of-the-art models and analyze policy outcomes.

This project has received funding from the European Research Council under the European Union’s Horizon 2020 research and innovation program (grant agreement no. 851891).

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