My PhD Dissertation revolves around the topic of household heterogeneity.
Monetary Policy and the Redistribution Channel in the Euro area
Abstract: Monetary policy has implicit redistribution effects for households when households are different. This paper is the first to show quantitatively how this changes the transmission mechanism of monetary policy to aggregate consumption response in the euro area. When households have heterogeneous MPCs and balance sheets, three redistribution channels amend the standard consumption response to monetary policy - an earnings heterogeneity channel, an inflation-driven Fischer channel and a real interest rate channel. Implicit redistribution after the monetary policy change creates winners and losers along these three dimensions. I extend the ECB HFCS to obtain a representative euro area dataset with detailed information on household balance sheets and MPCs and calculate the sufficient statistics to evaluate these redistribution channels. The effect of a one-time expansionary monetary policy change on aggregate consumption is amplified by up to 15% in comparison to a model without heterogeneity because of the implicit redistribution from low MPC to high MPC households and their unequal exposure to interest rate, price level and earnings changes. When household earnings elasticities to GDP changes are also heterogeneous, as estimated in the data, the redistribution channel amplifies the effects of monetary policy further to up to 37% in relation to the representative agent model. The relative power of different channels of monetary policy is revisited from the standard model - the redistribution channel with household heterogeneity makes up between 14% and 27% of the total consumption response, while the classical aggregate demand and the substitution channel amount to respectively 53% and 33%.
The Earnings Elasticities to Aggregate Fluctuations in the Euro Area
[Work in progress version of the paper]
Abstract: This paper documents how the earnings of different household groups vary with the change in aggregate GDP in the Euro area. These household earnings elasticities to aggregate economic fluctuations are a crucial moment for models with household heterogeneity – macroeconomics dynamics are transmitted differently throughout the economy when different household types react differently to macroeconomic shocks. This paper is the first to calculate the relative earnings elasticity of different income groups in the countries of the Euro area using three separate datasets and comparing the results. The three datasets deliver a consistent picture of higher earnings elasticities for the bottom income groups which decline along the income distribution. Importantly, the slope of these household betas – the change of individual earnings to aggregate earnings changes, is similar across two very different types of datasets – aggregated data on income groups from the WID and GRID databases, and microdata from the ECB HFCS dataset. This paper is the first to use the HFCS panel dataset to track earnings dynamics of households in the Euro area. It also decomposes the difference between the two types of estimations and shows the importance of individual level data for properly accounting for income mobility. I also analyse the correlation between earnings elasticities of different income groups and their MPC and show that the groups with the highest earnings elasticities γ on average also have higher MPCs. I show this leads to an amplifying multiplier effect which increases the baseline MPC in the economy by between 17% and 34% and therefore the aggregate multiplier by 6.7% to 13.5%.