Agents’ Heterogeneity, Aggregation, and Economic Fluctuations

We study the implications of agents’ heterogeneity for business cycle analysis with the help of a two dimensional non-linear dynamical system derived from a New Keynesian macroeconomic model with imperfect capital markets. In order to analyze the interaction between real and financial variables, we have focussed on the degree of financial fragility of the economy, as proxied by the ratio of corporate net worth to the stock of capital, that is the equity ratio. Our approach allows to analyze both fluctuations due to the impulse-propagation mechanism and self-sustaining endogenous cycles. In the former case, shocks transmitted and amplified by a propagation mechanism, which depends on the degree of agents’ heterogeneity. In the latter case self sustained business cycles are generated by the evolution over time of the distribution of heterogeneous agents, classified by the degree of financial fragility.