ERC Starting Grant “AIRMAC”
Aggregate and Idiosyncratic Risk in Macroeconomics
Studying the interaction of aggregate and idiosyncratic risk, with advances in HANK solution methods, asset pricing, and monetary and fiscal policy.
Ralph Luetticke
Professor of Economics · University of Tübingen
School of Business and Economics
Ralph Luetticke is a Professor of Economics and holds the Chair of Macroeconomics at the University of Tübingen. He is a Research Affiliate at CEPR and the Stone Centre on Wealth Concentration, Inequality, and the Economy at UCL. He earned his PhD from the University of Bonn and has held academic positions at UCL and visiting roles at Stanford University. He has also taught and consulted on heterogeneous agent macroeconomics at the Central Bank of Colombia, the ECB, the IMF, and the Inter-American Development Bank.
His research studies the conduct of fiscal and monetary policy as well as the sources of business cycles with new tools that allow us to take household heterogeneity into account in models and data.
Visit the chair’s website for information on the current team, open positions, and news.
Interests:
- Macroeconomics
- Fiscal and Monetary Policy
- Computational Methods
Projects
Research funding
Heterogeneous Expectations in HANK Models
Empirical Evidence, New Solution Methods, and Macroeconomic Implications
Combining household-survey evidence with new solution methods for HANK models with heterogeneous expectations to study business-cycle dynamics and the transmission of monetary and fiscal policy.
Research
Current work
All current papers are listed below. Select a title or Abstract to read more.
View all current workLocal Methods for Large Transfers 2026 AbstractClose abstract
Abstract
Large fiscal transfers shift households between regions with high and low marginal propensities to consume (MPCs), resulting in nonlinear aggregate responses. We develop a Nonlinear DEGM Update (NDU) method that shifts the wealth distribution nonlinearly over a short time window while solving the aggregate economy using a fast, first-order state-space approximation. A 10 percent transfer of annual GDP increases output by 4.5 percent in the nonlinear and NDU solutions, but by 12.0 percent in the linear solution. The empirical liquid-wealth distribution around zero disciplines this nonlinearity and exhibits a strong asymmetry. A stochastic debt-entry cost closely reproduces this empirical pattern.
The Military Multiplier 2026 AbstractClose abstract
Abstract
How effectively does defense spending translate into military capability? We introduce the military multiplier, defined as the percentage increase in military equipment generated by an additional dollar of defense spending. We show that the response of the relative price of defense goods to military buildups is a sufficient statistic for this multiplier: the stronger the price response, the smaller the multiplier. Time-series evidence for the United States shows that defense-sector prices rise sharply in response to military buildups in the post–Cold War period, implying a short-run multiplier of about 0.7, compared with values exceeding 1 during the Cold War. We develop and calibrate a multi-sector network model of the U.S. economy showing that this decline reflects high effective capital reallocation costs associated with the shrinking industrial base.
Macro Theory with Measured Expectation 2026 AbstractClose abstract
Abstract
The Lucas critique holds that policy evaluations based on historical correlations can fail because policy changes alter expectation formation. We develop a new approach to monetary policy evaluation that addresses this concern: we elicit expectations under alternative policy scenarios from household surveys and feed these measured expectations into a heterogeneous agent model. The surveys reveal that the response of income and inflation expectations to interest rate changes is state-dependent. Incorporating these expectation differences into the model yields estimates of the effects of policy on aggregate consumption that are state-dependent, varying with economic conditions at the time of the policy change.
Inequality, Informality, and Optimal Progressivity 2026 AbstractClose abstract
Abstract
How should governments design progressive labor-income taxes when workers can shift labor supply into untaxed informal work? Using household surveys for Brazil, Colombia, Mexico, and Peru, we document steep gradients in informality, employment, and unemployment across the income distribution. We analyze non-linear tax schedules in a heterogeneous-agent model with search frictions, savings, and an endogenous formal–informal labor-supply margin. Progressivity operates through an inclusion margin at the bottom—negative income taxes increase formal attachment—and an evasion margin at the top, where higher marginal tax rates shift labor supply into the untaxed sector. These opposing forces imply that both welfare and formality are hump-shaped in progressivity; in a calibration to Mexico, the welfare-maximizing degree of progressivity is about five times the current level.
The Great Leveler according to HANK 2025 AbstractClose abstract
Abstract
Using historical income and wealth data, we show that war reduces inequality: the top-1% income share falls by 20% and the top-1% wealth share by 10%. We measure three key drivers of inequality-capital destruction, taxation, and inflation-in the data and quantify their role with a Heterogeneous Agent New Keynesian (HANK) model. Destruction depresses profits and thus top incomes. Taxation primarily influences wealth dynamics, while inflation has little effect on top shares, but reduces indebtedness among poorer households. We validate our findings using new data on inequality across German towns in World War 2 and cross-country data on profits.
HANK's Response to Aggregate Uncertainty in an Estimated Business Cycle Model 2024 American Economic Review, revise&resubmit AbstractClose abstract
Abstract
This paper studies a HANK model with agents who respond to both idiosyncratic and aggregate uncertainty. Since aggregate uncertainty is modeled as ambiguity, it affects the steady state and linearized dynamics, allowing for fast computation and estimation. The interaction of aggregate uncertainty shocks and portfolio frictions generates a high capital premium as well as most cyclical comovement in macroeconomic aggregates. Heterogeneity in portfolios is crucial: when it is shut down, the model fails to explain investment dynamics and the capital premium disappears. Cautious price and wage setting by firms in anticipation of aggregate uncertainty shapes employment and inflation dynamics.
Research
Publications
All publications are listed below. Select a title or Abstract to read more.
View all publicationsA Temporary VAT Cut as Unconventional Fiscal Policy 2026 Review of Economic Studies, rdag055 · Published online 10 June 2026 AbstractClose abstract
Abstract
We exploit Germany’s temporary three-percentage-point VAT cut in the second half of 2020 to study the spending response to unconventional fiscal policy. We use survey and scanner data on household consumption expenditures and their perceived pass-through of the tax change into prices and a HANK model to quantify the effects of this VAT policy. The survey and scanner data show that the temporary VAT reduction led to a relative increase in durable and, to a lesser extent, semi-durable spending for individuals with high perceived pass-through. According to the HANK model, the VAT policy increased total aggregate consumption spending by 4.4 percent on impact.
Unconventional but Different After All? A Unified Series of Narrative Monetary Policy Shocks 2026 Journal of Money, Credit and Banking, accepted AbstractClose abstract
Abstract
We construct a unified series of narrative monetary policy shocks for the U.S. that spans both conventional and unconventional policy episodes, combining Romer and Romer’s identification with Wu and Xia’s shadow rate. The methodological consistency across regimes allows us to formally test whether monetary policy transmission differs at the zero lower bound. Structural-break tests cannot reject equality of aggregate peak responses, but strongly reject it for wealth inequality. Expansionary unconventional shocks increase wealth inequality-the opposite of conventional easing-because stock prices rise disproportionately relative to house prices, benefiting equity-heavy households at the top of the distribution.
Financial Frictions: Macro vs Micro Volatility 2026 American Economic Review, 116(2), 464-501 AbstractClose abstract
Abstract
We argue that consumer credit spreads matter materially for household choices and that time-varying spreads have important distributional consequences. Studying Danish household data, we show that elevated consumer credit spreads reduce indebted households’ consumption and that the marginal propensity to consume is countercyclical partially due to credit spreads. We study a HANK-model in which banks provide consumer credit and corporate loans. Through countercyclical credit spreads, frictional finance amplifies aggregate shocks and induces consumption inequality. Economies with less leveraged banks may experience reduced aggregate volatility by muting the financial accelerator, but may also face higher volatility and lower welfare at the household level.
An Endogenous Gridpoint Method for Distributional Dynamics 2026 Journal of Monetary Economics, 103895 AbstractClose abstract
Abstract
Modeling continuous choices in heterogeneous agent models as ``lotteries’’ over a discretized state space is standard practice (Young, 2010), but renders the distributional dynamics linear in optimal policies. We present a novel, simple method that captures nonlinearities and solves the distributional dynamics with interpolation instead of integration using the idea of an endogenous grid. Our approach solves for a stationary equilibrium as quickly as the lottery method for a given precision, outperforms it for linear dynamics, and accommodates nonlinear dynamics and aggregate risk. We demonstrate its efficacy by studying a model with aggregate investment risk with a third-order perturbation solution.
Shocks, Frictions, and Inequality in US Business Cycles 2024 American Economic Review, 114, 5, pp. 1211–47 AbstractClose abstract
Abstract
We show how a heterogeneous-agent New-Keynesian (HANK) model with incomplete markets and portfolio choice can be estimated in state space using a Bayesian approach. To render estimation feasible, the structure of the economy can be exploited and the dimensionality of the model automatically reduced based on the Bayesian priors. We apply this approach to analyze how much inequality matters for the business cycle and vice versa. Even when the model is estimated on aggregate data alone and with a set of shocks and frictions designed to match aggregate data, it broadly reproduces observed US inequality dynamics.
The Liquidity Channel of Fiscal Policy 2023 Journal of Monetary Economics, 134, pp. 86-117 AbstractClose abstract
Abstract
We provide evidence that expansionary fiscal policy lowers return differences between public debt and less liquid assets—the liquidity premium. We rationalize this finding in an estimated heterogeneous-agent New-Keynesian model with incomplete markets and portfolio choice, in which public debt affects private liquidity. This liquidity channel stabilizes fixed-capital investment. We then quantify the long-run effects of higher public debt and find little crowding out of capital, but a sizable decline of the liquidity premium, which increases the fiscal burden of debt. We show that the revenue-maximizing level of public debt is positive and has increased to 60 percent of US GDP post-2010.
The Coronavirus Stimulus Package: How large is the transfer multiplier? 2023 Economic Journal, 133(652), pp. 1318-1347 AbstractClose abstract
Abstract
In response to the COVID-19 pandemic, large parts of the economy were locked down and, as a result, households’ income risk rose sharply. At the same time, policy makers put forward the largest stimulus package in history. In the U.S., it amounted to $2 trillion, a quarter of which represented transfer payments to households. To the extent that such transfers were i) announced in advance and ii) conditional on recipients being unemployed, they mitigated income risk associated with the lockdown - in contrast to unconditional transfers. We develop a baseline scenario for a COVID-19 recession in a medium-scale HANK model and use counterfactuals to quantify the impact of transfers. For the short run, we find large differences in the transfer multiplier: it is negligible for unconditional transfers and about unity for conditional transfers. Overall, we find that the transfers reduced the output loss due to the pandemic by some 2 percentage points at its trough.
Unconventional Fiscal Policy at Work 2023 AEA Paper & Proceedings, 113, pp. 61-64 AbstractClose abstract
Abstract
In an effort to stabilize the economy during the Covid-19 pandemic, the German government reduced value added taxes (VAT) by three percentage points for a period of six months in the latter half of 2020. This measure resulted in a boost in aggregate consumer spending on both durable and semi-durable goods during the six-month period, with spending decreasing once the VAT reduction was reversed. The effect of the temporary VAT cut on durable spending was stronger than on semi-durable spending. Additionally, the temporary VAT cut also stabilized, and even slightly increased, inflation expectations in the second half of 2020.
Transmission of Monetary Policy with Heterogeneity in Household Portfolios 2021 American Economic Journal: Macroeconomics, 13 (2): 1-25 AbstractClose abstract
Abstract
This paper assesses the importance of heterogeneity in household portfolios for the transmission of monetary policy in a New Keynesian business cycle model with uninsurable income risk and assets with different liquidity. In this environment, monetary transmission works through investment, but redistribution lowers the elasticity of investment via two channels: 1) heterogeneity in marginal propensities to invest, 2) time variation in the liquidity premium. Monetary contractions redistribute to wealthy households who have high propensities to invest and a low marginal value of liquidity, thereby stabilizing investment. I provide empirical evidence for counter-cyclical liquidity premia and heterogeneity in household portfolio responses.
Solving heterogeneous agent models in discrete time with many idiosyncratic states by perturbation methods 2020 Quantitative Economics, 11, pp. 1253-1288 AbstractClose abstract
Abstract
This paper describes a method for solving heterogeneous agent models with aggregate risk and many idiosyncratic states formulated in discrete time. It extends the method proposed by Reiter (2009) and complements recent work by Ahn et al. (2017) on how to solve such models in continuous time. We suggest first solving for the stationary equilibrium of the model without aggregate risk. We then write the functionals that describe the recursive equilibrium as sparse expansions around their stationary equilibrium counterparts. Finally we use the perturbation method of Schmitt-Grohé and Uribe (2004) to approximate the aggregate dynamics of the model.
Precautionary Savings, Illiquid Assets, and the Aggregate Consequences of Shocks to Household Income Risk 2019 Econometrica, 87, pp. 255-290 AbstractClose abstract
Abstract
Households face large income uncertainty that varies substantially over the business cycle. We examine the macroeconomic consequences of these variations in a model with incomplete markets, liquid and illiquid assets, and a nominal rigidity. Heightened uncertainty depresses aggregate demand as households respond by hoarding liquid “paper” assets for precautionary motives, thereby reducing both illiquid physical investment and consumption demand. We document the empirical response of portfolio liquidity and aggregate activity to surprise changes in idiosyncratic income uncertainty and find both to be quantitatively in line with our model. The welfare consequences of uncertainty shocks and of the policy response thereto depend crucially on a household’s asset position.
Open source
Code
Research code, replication resources and solution methods.
Unconventional but Different After All? — Replication code
Python code and data for constructing the paper’s unified series of narrative monetary policy shocks, spanning conventional and unconventional policy episodes.
BASE for HANK Toolbox
Bayesian Solution and Estimation (BASE) for HANK toolbox in Julia. Toolbox for estimating medium-scale HANK models based on Bayer, Born, Luetticke (2020) . https://github.com/BASEforHANK We have uploaded to GitHub implementations of our toolbox for a HANK-2-Asset model, HANK-1-Asset model, the corresponding RANK model, and a Krusell-Smith model.
Matlab implementation of our reduction method
Comparison of Perturbation vs MIT shock solution for Krusell-Smith model (Matlab) https://github.com/ralphluet/KS_Perturbation_vs_MIT Perturbation solution with our reduction method for Krusell-Smith and HANK models (Matlab) https://github.com/ralphluet/perturbation_codes
Lecture slides on perturbation solutions for HANK models
The following lecture is a short-course on how to use perturbation methods to solve heterogeneous agent models. Download slides .
Python implementation of our reduction method
Perturbation solution with our reduction method for HANK models (Python) https://github.com/econ-ark/BayerLuetticke
Courses & lectures
Teaching
University courses and short courses in macroeconomics.
BASEforHANK School
I co-organise the BASEforHANK School. Following the success of our last summer school at DIW Berlin, the next edition will take place in March 2027.
Summer Schools on Heterogenous Agent Macro
I have been invited to teach my research material and open-source codes on the solution methods for heterogenous agent models with aggregate shocks to Ph.D. students / economists at renowned institutions and universities.
Courses and thesis supervision at the University of Tübingen
Current courses and information on Bachelor’s and Master’s thesis supervision in macroeconomics.
Courses at University College London
At University College London I have taught macroeconomics at all levels (BSc, MSc, PhD). BSc: Economic Policy Analysis MSc: Advanced Macroeconomic Theory PhD: Macroeconomics I
Beyond the papers
Other writing
Research perspectives and policy commentary.
Rüstung und Inflation: Der Preis der Sicherheit
With Gernot Müller. On Germany’s rising defence spending and the risk that higher prices erode its purchasing power.
German election: a triple crisis looms large at the heart of the economy
With Gernot Müller. On weak productivity, high energy costs and a declining labour supply ahead of Germany’s 2025 election.
Germany's temporary VAT cut in 2020
VoxEU blog post about Germany’s temporary VAT cut in 2020 and its effect on consumption. Based on my research paper Bachmann, Born, Goldfayn-Frank, Kocharkov, Luetticke, Weber (2021) .
The economic consequences of rising public debt in the US
VoxEU blog post summarizing my research on the economic consequences of rising public debt in the US. Based one my research paper Bayer, Born, Luetticke (2021) .
Aggregate and distributional consequences of the CARES stimulus package in the US
VoxEU blog post on the aggregate and distributional consequences of the CARES stimulus package in the US. Based one my research paper Bayer, Born, Luetticke, Mueller (2020) .
US business cycles and inequality through the lens of an estimated HANK model
VoxEU blog post on US business cycles and inequality through the lens of an estimated HANK model. Based one my research paper Bayer, Born, Luetticke (2020) .