Kurt Mitman | Macro Paper Warehouse

Distributional Consequences of Becoming Climate-Neutral

Thu, 01 Jan 2026 00:00:00 +0000

This paper investigates how the EU’s Fit-for-55 climate package will affect aggregate output and distribute its costs across the income distribution. The question matters because energy is a necessity good — poorer households devote a larger share of spending to energy — so policies that raise energy prices are regressive in their first-order incidence. Despite a large literature on the aggregate macroeconomics of the green transition, distributional consequences have received limited attention.

Exploiting MIT shocks in heterogeneous-agent economies: the impulse response as a numerical derivative

This paper proposes a new way to compute the equilibrium of heterogeneous-agent models with aggregate uncertainty: rather than building a recursive, linearized law of motion for a high-dimensional state such as the cross-sectional wealth distribution – the strategy behind existing linearization methods including Reiter (2009, 2010), Childers (2017), and Ahn, Kaplan, Moll, Winberry, and Wolf (2017) – the authors solve, using entirely standard nonlinear methods, a single deterministic perfect-foresight transition path that follows a one-time, unexpected (“MIT”) shock away from the model’s non-stochastic steady state. Under the working assumption that the true stochastic equilibrium is well approximated by a linear system, that one nonlinear transition path is literally the model’s numerical derivative at each future time horizon, so the response to any sequence of aggregate shocks – and to any number of independent shocks, with computation time rising only linearly in the number of shocks – can be recovered by scaling and summing copies of this single impulse response, with no analytical differentiation and no explicit treatment of the distribution as a linearized state. The only nontrivial numerical tool the method requires is value-function iteration: once to solve the model’s non-stochastic steady state, and again, backward over a finite horizon, to solve for the transition path, with the passage of calendar time serving as the sole state variable added along the way. Applied to a standard Aiyagari-style economy with valued leisure and two aggregate technology shocks, the method reproduces conditional-moment results close to Dynare’s linearization- and second-order-perturbation-based solutions in a representative-agent benchmark, delivers accurate impulse responses (including for distributional statistics like the Gini coefficient and the hand-to-mouth share) in the heterogeneous-agent case, and, in an extension with a consumption externality and deficit-financed transfers, shows that Ricardian equivalence breaks down and fiscal transfers have real stabilizing effects – all without added numerical difficulty. The paper reports that its own scalability and additivity checks are satisfied “with flying colors” in this application, but is explicit that the whole approach rests on the assumption that linearization is in fact a good approximation for the model at hand, offers no formal stability or determinacy characterization of the transition path it computes, and, unlike recursive methods, provides no separate goodness-of-fit metric for that assumption.

Household Heterogeneity and the Transmission of Foreign Shocks

This paper builds a Heterogeneous-Agent New-Keynesian Small Open Model Economy (HANKSOME) – combining the standard Bewley-Imrohoroğlu-Huggett-Aiyagari incomplete-markets household block with the Galí and Monacelli (2005) small-open-economy New Keynesian framework – to study how household heterogeneity shapes the transmission of a foreign credit-supply shock, motivated by Hungary’s foreign-currency mortgage boom of the 2000s and its sudden-stop reversal around 2009. Its central finding is that when households owe debt denominated in foreign currency, a floating exchange rate’s depreciation mechanically revalues that debt upward, reducing net worth and triggering a sharp contraction in consumption that is concentrated among highly leveraged, high-marginal-propensity-to-consume, low-wealth households – even though aggregate output actually rises on impact via a labor-supply response, so the usual “contractionary devaluation” mechanism is not what drives the welfare loss. As a result, a fixed exchange rate, despite generating its own recession through binding nominal rigidities, prevents most of this debt revaluation and is preferred by more than 90% of households in the paper’s Hungary-calibrated experiment, providing a welfare-based rationale for the empirically documented “fear of floating” that does not rely on devaluations being output-contractionary.

Macroeconomics and Household Heterogeneity

This Handbook of Macroeconomics chapter studies how, and by how much, household income, wealth, and preference heterogeneity amplify and propagate a macroeconomic shock, focusing on the U.S. Great Recession of 2007-2009. Using Panel Study of Income Dynamics (PSID) household-level panel data, the authors first document that net worth is far more concentrated than earnings, income, or consumption, that the bottom two wealth quintiles hold essentially no net worth yet account for roughly a quarter of aggregate consumption expenditure, and that during the Great Recession these wealth-poor households cut their consumption growth by more than their income-growth slowdown alone would predict – evidence the authors read as increased precautionary saving rather than mechanical hand-to-mouth behavior. They then build and calibrate several variants of a canonical Krusell-Smith-style heterogeneous-household real business cycle model, adding preference heterogeneity, persistent idiosyncratic earnings risk, a stylized life-cycle/retirement structure, and unemployment insurance to match the empirical wealth distribution, including its low tail. The central finding is that wealth inequality significantly amplifies the aggregate consumption response to a Great Recession-sized shock – but does so specifically when the distribution features a sufficiently large mass of low-net-worth households who are not simply hand-to-mouth but instead sharply raise their saving rate as the recession hits, both because some of them do lose their jobs and because others, still employed, save against the now-elevated risk of future job loss. The benchmark economy with realistic wealth inequality generates a consumption decline about 0.5 percentage points larger than a representative-agent economy; the paper further shows that the generosity of unemployment insurance has a two-fold and partially offsetting effect on this amplification – softening the consumption drop of a given household while also shifting the long-run wealth distribution toward higher net worth – and that when output is allowed to be partially demand-determined through an aggregate-demand externality, larger wealth inequality also deepens the output decline itself, giving social insurance an additional macro-stabilization role.

The Fiscal Multiplier

This paper builds a Heterogeneous Agent New Keynesian (HANK) model – combining the standard incomplete-markets model of consumption and saving with New Keynesian price and wage rigidities, capital accumulation, and a government budget constraint specified partly in nominal terms – to quantify the fiscal multiplier for essentially any combination of realistic monetary and fiscal policy. The nominal specification of government debt is deliberate: it lets the model exploit a result (Hagedorn 2016, 2018) guaranteeing a uniquely determined price level even when the nominal interest rate is pegged, avoiding the indeterminacy problem that afflicts representative-agent New Keynesian models at a fixed rate and allowing the authors to compute a well-defined multiplier at the zero lower bound. The authors find the multiplier is highly sensitive to financing: with a pegged nominal rate, it is 1.34 (cumulative 0.55) when spending is deficit-financed but only 0.61 (cumulative 0.43) when contemporaneously tax-financed, with broadly similar values obtained in a simulated liquidity trap; once monetary policy instead follows a Taylor rule, both multipliers fall and largely converge, to 0.66 and 0.54 respectively, because the larger inflationary impact of deficit-financed stimulus triggers a correspondingly larger monetary tightening that offsets much of its extra stimulative power. Decomposing household consumption responses into an intertemporal-substitution channel and a redistribution channel, the paper traces the multiplier’s size to the interaction of market incompleteness with dynamic, forward-looking behavior: unlike in tractable two-agent (TANK) models, in which hand-to-mouth households respond only to current income, households in this model also respond to anticipated future income changes induced by the stimulus, producing materially larger multipliers than TANK models calibrated to the same current-period marginal propensity to consume – a difference the authors attribute to “dynamic anticipation effects arising in the HANK model that are absent in TANK.”