Heterogeneity, Macroeconomic Dynamics, and Monetary Policy: Theoretical and Computational Perspectives

This paper provides a comprehensive review of the fast‐expanding literature on household heterogeneity in macroeconomic models. It not only examines the main mechanisms through which household heterogeneity affects the transmission of monetary policy, but also offers a unified framework for understanding the main analytical and numerical approaches used to solve macroeconomic models with heterogeneity. These include limited‐heterogeneity, history‐truncation, and no‐trade equilibria on the analytical side; forecasting‐rule, linearization (state‐space or sequence‐space), and global methods on the numerical side. By highlighting the links and trade‐offs among these approaches, the paper provides guidance for selecting appropriate solution techniques depending on the structure and purpose of the model.