Heterogeneity, Aggregate Uncertainty, and the Short-Term Interest Rate.

This paper analyzes the relationship between the short-term interest rate and diversity (i.e., the number of types) in models with heterogeneous agents and incomplete markets. The number of types needed to approximate a continuum varies across examples. In all cases, however, the number of types has little effect on the average interest rate and consumption variability. In these models, the set of state variables is large since the equilibrium law of motion depends on the cross-sectional wealth distribution. The paper shows how to solve these models numerically by approximating the distribution using moments or percentiles.