ERC Advanced Grant · 2024
Pushing the Frontier of Heterogeneous Agent Macro: Expectations Formation and Economic Crises
One of the key developments in macroeconomics research over the last three decades has been the incorporation of explicit heterogeneity into models of the macroeconomy. But one of the all-time biggest questions in macroeconomics has so far been out of reach for this approach: why do developed economies experience infrequent but large economic crises? This is due to a problematic feature of current heterogeneous agent (HA) models: the assumption of rational expectations means that agents forecast prices by forecasting distributions resulting in the entire cross-sectional distribution entering their decision problem. This extreme version of the curse of dimensionality hugely increases the…
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