Essays in Heterogeneous Agent Macroeconomics

Abstract

This dissertation consists of three chapters. The first chapter surveys the literature on the solving of heterogeneous agents models. From the Bewley/Huggett/Aiyagari models of the 1990s that focus on idiosyncratic risk to the addition of aggregate risk in models based on Krusell-Smith’s heterogeneous agent model have become standard workhorses of macroeconomics. This is unlikely to change as the increased availability of household level data and improvements in computational speed have made previously infeasible models not only solvable but also able to be disciplined. The second chapter presents a model of international transmission of financial shocks where the country of origin is fundamental to the transmission of the shock. Highly developed countries tend to accumulate larger positions in riskier, but more productive, capital flows, as seen in the data. When a financial shock occurs, the ability to insure is impaired, which lessens demand for risky foreign capital, which lowers production abroad. We interpret the Financial Crisis of 2008 as a change in the ability of financial market quality and calibrate the model to match the change in capital flows. Importantly, the calibrated model matches not only changes in capital flows, but also relative movements in interest rates as well as changes in debt flows. The third chapter examines the concern about the observed decline in entrepreneurship over the past 30 years. This chapter argues the decline reflects a change in the timing of entrepreneurship decisions because of increased educational attainment and its associated cost. A greater number of older workers and fewer young people are choosing to become entrepreneurs. I find that trends in education costs, the skill premium, and the compression of morbidity quantitatively explain the change in the age composition of entrepreneurs. In a series of sensitivity analyses, I establish that, to successfully match the observed rates, it is important to take into account each of these trends. An additional implication of the model is that efficiency increases sharply with a better educated workforce indicating that decreased entrepreneurship might not be as troubling a trend as previously thought.