My PhD Dissertation revolves around the topic of household heterogeneity. 

Monetary Policy and the Redistribution Channel in the Euro area 

[Work in progress version of the paper]

[Defensio Slides] 

Abstract: Monetary policy has implicit redistribution effects for households when households are different. This changes the aggregate consumption response to interest rate changes. This paper is the first to estimate the magnitude of redistributionary channels of monetary policy in the euro area. When households have heterogeneous MPCs and balance sheets, three redistributionary channels amend the standard consumption response to monetary policy - an earnings heterogeneity channel, an inflation-driven Fischer channel and a real interest rate channel. I construct a new dataset combining the ECB HFCS and the Eurostat HBS to obtain a representative euro area dataset with detailed information on household balance sheets and consumption. I use a unique question in the HFCS to calculate the sufficient statistics necessary to evaluate these redistribution channels. For the Euro area the three redistribution channels enhance monetary policy - the effects of onetime expansionary monetary policy shocks in stimulating consumption are stronger than in models without heterogeneity. In the euro area, a 1% decrease in the real interest rate redistributes wealth from creditors to debtors, and creates further income and price effects. This increases aggregate consumption through unequal exposure to interest rate changes, the price level and earnings respectively by 9 basis points, 7 basis points and another 2 basis points. Redistribution amplifies the monetary policy change and makes the aggregate consumption response 15% higher. The relative power of different channels of monetary policy is revised from the standard model - the substitution channel with household heterogeneity contributes to 14%, while the aggregate demand and the redistributionary channels amount to respectively 53% and 33%. When households earnings react unequally to GDP changes, as estimated in the data, their heterogeneous individual earnings elasticities enhance this effect further and the magnitude of the redistribution channel of earnings heterogeneity increases to between 14% to 27%. With heterogenous earnings elasticities redistribution amplifies the effects of monetary policy with up to 37%.  

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%.