Kurt Mitman, Alexandre Kohlhas, Kathrin Schlafmann, Tobias Broer

Project summary

Better models for economic policy analysis

How is society affected by monetary and fiscal policy? What drives sharp rises and falls in house prices, and what effects do these fluctuations have on society?

 

How should economic policy be designed to prevent another financial crisis? To answer these questions, governments and central banks need stylised representations, or models, of the macroeconomy. By their very nature, these models abstract considerably from the complexity of modern societies. Most models currently used for policy analysis lack components that are crucial for designing effective economic policy.

 

This project aims to develop better models for policy analysis by enriching them along three empirically relevant dimensions. First, we replace the representative consumer with heterogeneous households that differ in terms of income, wealth and employment status. This is essential, not least for analysing the distributional consequences of economic policy.

 

Second, we model labour and housing markets in a more realistic way. Rather than assuming perfect markets in which buyers and sellers meet immediately and at no cost, we model the time- and resource-intensive search and matching processes that characterise these markets.

 

Finally, we introduce heterogeneous and not necessarily accurate household expectations about the future development of economic variables. We believe that our richer and more realistic framework will provide better guidance for economic policymaking in Sweden and elsewhere.