Aggregation and the Microfoundations of Dynamic Macroeconomics

This book argues that modern macroeconomics has completely overlooked the aggregate nature of the data. In Part I the homogeneity assumption is tested using disaggregate data and strongly rejected. As shown in Part II, the consequence of introducing heterogeneity is that, apart from flukes, cointegration unidirectional Granger causality, restrictions on parameters do not survive aggregation: thus the claim that modern macroeconomics has solid microfoundations is unwarranted.

However, it is argued in Part III that aggregation is not necessarily bad. Some important theory-based models that do not fit aggregate data well in their representative-agent version can be reconciled with aggregate data by introducing heterogeneity.