The theory that rich economic diversity of businesses and households both affects and is shaped by economy-wide fluctuations has strong implications for monetary policy. This review places these insights in a Canadian context.
During downturns, workers get stuck in low-productivity jobs and wages remain stagnant. I build an heterogenous agent incomplete market model with a full job ladder that accounts for these facts. An adverse financial shock calibrated to the US Great Recession replicates the period’s slow recovery and missing disinflation.