Aggregation of linear dynamic microeconomic models

Abstract

We survey a number of important results concerning aggregation of dynamic, stochastic relations. We do not aim at a comprehensive review; instead, we focus heavily on the results collected in Forni and Lippi [Forni, M., Lippi, M., 1997. Aggregation and the Microfoundations of Dynamic Macroeconomics. Oxford University Press, Oxford]. We argue that the representative-agent assumption is misleading and the microfoundation of dynamic macroeconomics should be based on explicit modeling of heterogeneity across agents. An unpleasant aspect of this modeling strategy is that macroeconomic implications of micro theory are difficult to obtain. However, difficulties are reduced by large number results. Moreover, puzzling implications of existing theories could be reconciled with empirical evidence on macro data.