HIPSTERMacro · Housing, Inequality, and Price-Setting: Theory, Evidence, and Ramifications for the Macroeconomy

This project will develop macroeconomic models with household and firm heterogeneity to investigate the importance of housing, inequality, and price-setting in macroeconomic fluctuations and the transmission and efficacy of policy. The objective is to provide a modeling framework that is consistent with both empirical microeconomic evidence on household and firm behavior and macro evidence on the response of the aggregate economy to economic shocks. A central theme will be on non-linearities and large shocks. Computational methods for solving heterogeneous agent models non-linearly in the sequence space will be developed. The ultimate goal is to help make these models the new standard for the study of fluctuations and policy evaluation in macro.Inequality and incomplete markets will be a central theme. The first objective is to quantify how changes in monetary policy redistribute resources across households and demographic groups, including gender, race, and ethnicity. The project will also focus on the price-setting behavior of firms by studying state-dependent pricing models. It will show how shifts in nominal demand can lead to shifts in the New Keynesian Phillips Curve. Next, the project will study monetary and fiscal policy in a high-inflation environment when incomplete markets and state-dependent pricing interact.The project will also focus on housing and mortgage debt as an amplification and propagation mechanism. The project will develop a rich benchmark model of housing for policy evaluation. First, the project will investigate how housing and debt heterogeneity affect monetary policy transmission. Next, the state-dependent pricing model will be integrated into the housing model to perform a cross-country analysis to quantify the importance of different arrangements in the mortgage market for the economy's response to the inflationary episode post-COVID pandemic.