BoE paper argues for heterogeneous agent modelling

Modelling households as heterogeneous can shed light on fiscal policy and avoid unrealistic results, research published by the Bank of England finds.

Cristiano Cantore and Lukas Freund present a “capitalist-worker two-agent New Keynesian model”. There are two types of household: “workers”, who supply labour and can buy bonds, subject to portfolio adjustment costs; and “capitalists”, who own all the economy’s firms and do not supply labour.

Cantore and Freund find their model matches evidence