Research
Research
Despite rapid advances, heterogeneous agent models with idiosyncratic risk are unable to reproduce the wealth inequality observed in the data. Generally, these models generate too little wealth dispersion for reasonable calibrations. Many macroeconomists suggested ideas to address this puzzle, and among those who tried by elaborating the model, some have paid attention to the utility function, namely consumers' behaviour. This paper sits in line with this research, assuming that households agents display loss aversion in a heterogeneous agents dynamic stochastic general equilibrium (DSGE) model. With loss aversion, agents have an extra motive for precautionary savings especially among the wealthier agents and hence, will affect the upper tail of the wealth distribution. Quantitative analysis shows that, under standard parameterisations of the utility function, the model achieves a significant increase in the wealth inequality and the savings rate, along with the degree of loss aversion. In addition, higher kurtosis and positive skewness suggest a thicker upper right tail, implying more wealth concentration among wealthier agents. Lastly, the shape of distribution in some Cumulative Density Function (CDF) and Probability Density Function (PDF) figures suggest that loss aversion can generate a bimodal distribution leading to higher wealth inequality. These results were obtained under conditions that ensure the existence of equilibrium, thus consistent with general equilibrium. Further analyses were conducted on how the role of the constant relative risk aversion coefficient (CRRA) was related to loss aversion to generate wealth inequality.
The recent 'cost-of-living' crisis refers to the situation where agents' affordability worsens off due to inflation, especially in the essential goods such as food, energy, transportation, raw materials, etc. Triggered by the war by Russia against Ukraine, it was the supply side inflation attributed to the mark-up shock, or the increase in the production cost. Unlike most of existing research that has studied the inflation from the demand side, this paper models the supply side inflation by modifying TANK model. In particular, I split the types of goods into essential and normal goods, introduced the quasi-linear utility function, and derived the threshold income by which the two types households, the rich and the poor, are differentiated. It turned out that the increase in the essential sector price, caused by its mark-up shock, aggravates the aggregate demand as well as essential consumption. Also, it shows the conditions under which the income and consumption inequality can exacerbate. Employment could alleviate the effect through the income effect. Price increase in the normal goods has the opposite result in the normal consumption due to the inter-temporal responses from the rich households, but increases consumption inequality. Total productivity shock brings about the opposite effect on the aggregate demand and the consumption inequality. The novelty lies in the derivation of endogenous fraction from the threshold income, which is a function of essential price. The sectoral analysis linked with households types is also original at my best knowledge. The results suggest the need for an alternative policy rule that takes account of sectoral characteristics (essential price level vs normal expected inflation) as well as heterogeneous behaviour between two types of agents.Â