For a long time, modern theoretical macroeconomics-dynamic general equilibrium theory-has built on the representative agent assumption: there is one consumer in the economy, and one firm. Although this theorizing has been very useful in many ways, it is by definition silent on some of the issues that are central to almost all policy debate: what is the differential impact of a given change in policy on different consumers, for example the rich and the poor, or the `lucky` and `unlucky` workers? The unemployment variable in traditional, reduced form macroeconomic models captured some of this concern. Clearly, though, it is important to have a broader view of inequality. Recently, economic theory and computational methods have undergone substantial progress in the ability to analyze dynamic general equilibrium models with agent heterogeneity. This progress has opened the possibility of specifying quite realistic models in terms of income and wealth heterogeneity and studying the effects of economic policy explicitly. In particular, it is possible to study quantitatively how policy affects the welfare of different groups, besides the standard efficiency concerns. The investigators' previous work focused on solving and analyzing a macroeconomic model where consumers differ in various respects: in income, wealth, employment status, and preferences. The purpose of this research project is to continue this work and extend it in a number of directions. The overall purpose of the extensions is to obtain a better understanding of the determinants of inequality and, in particular, a richer picture of the effects of a number of often discussed macroeconomic policies. The issues of most interested are: the costs of business cycles and the effects of stabilization policy; the effects of `welfare policy`, including specific or general subsidies and progressive tax schedules; and the interactions between productivity (technological) change and inequality through the labor market. In order to capture the main quantitative determinants of inequality, the investigators develop and refine their baseline model. An important goal is to further the analytical tools available for analyzing these complex macroeconomic models. Special emphasis is devoted to the continued development of computational techniques
