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I-HANK: The International Heterogeneous-Agent New Keynesian model

Carlsberg Foundation Young Researcher Fellowships

What

Why are booms and busts in economic activity so closely connected across countries? While this question is crucial for designing stabilization policies, it has challenged international macroeconomists for decades. An emerging literature studies business cycles through the lens of macroeconomic models featuring heterogeneity in income and wealth levels across households. Such Heterogeneous-Agent New Keynesian (HANK) models establish a link between distributional issues and macroeconomic outcomes. With very few exceptions, however, the existing literature has focused on models of closed economies. The aim of this project is to develop an International HANK model (I-HANK), and investigate the hypothesis that such a model can explain the international co-movement of business cycles.

Why

One explanation for the international co-movement of Gross Domestic Product (GDP) across countries is that some of the driving forces behind economic fluctuations - such as the economic repercussions of the COVID-19 pandemic - are cross-border phenomena in nature. Another explanation is that countries trade with each other, thus transmitting booms or recessions to their trading partners. Yet, existing economic models that reflect these facts still struggle to account for the high degrees of co-movement of GDP observed across industrialized countries. This means that existing models tend to understate the importance of foreign economic developments for small open economies such as Denmark. In turn, this may lead to misguided economic policy recommendations.

How

The research project has two main components; one empirical and one theoretical. The empirical component aims at extending our knowledge about the international co-movement of business cycles by collecting and analyzing new data on how disaggregated and distributional business-cycle statistics are correlated across countries. The theoretical component focuses directly on the development of the new I-HANK model and on analyzing its ability to explain the international co-movement of business cycles. To maximize the impact of the project, I wish to establish an international network of young researchers to provide the basis for a broader research programme within this area. As a part in this, two PhD students and one postdoc will be hired to work on the project.

SSR

The project will lead to better and more accurate economic models that take the feedback loop between income inequality and macroeconomic outcomes into account. Thus, it will contribute to better and more realistic model-based economic policy recommendations, benefiting society as such.