Essays on the Aggregate Implications of Heterogeneity

In recent years there has been an explosion of micro data that can be used to inform models of the macro economy. A common feature of these expansive data sets is that there is vast heterogeneity at the micro level. In my dissertation, I contribute to the literature examining the macroeconomic implications of this heterogeneity.;My dissertation focuses on the micro data that underlies the Consumer Price Index. I use this micro price data to answer questions about firm price-setting and the effects of monetary policy: Does the effectiveness of monetary policy vary across time? What can micro price data tell us about the nature of business cycle shocks? Is the frequency of price adjustment at the micro level consistent with substantial stickiness at the macro level? What are the sources of nominal price rigidity for individual items?;The first chapter of my dissertation asks whether monetary policy is less effective during recessions. I argue that uncertainty rises during recessions, which leads to an increase in aggregate price flexibility so that nominal stimulus mostly generates inflation rather than output growth. To do this, I estimate an Ss price-setting model with "uncertainty shocks" and show that this model matches new facts in CPI micro-data that standard price-setting models miss. Furthermore, the model implies that output responds dramatically less to nominal stimulus during uncertain recessions. For example, the estimated output response to additional nominal stimulus in October 2001, a highly uncertain time, is one fourth of the response in September 1995, a time of low uncertainty. I confirm this prediction by estimating forward-looking Phillips curves that show a greater inflation-output tradeoff during times of high uncertainty.;The second chapter (with David Berger) documents four new facts about the dynamics of the distribution of price changes in the United States: 1) The cross-sectional dispersion (second moment) of price changes is strongly countercyclical. 2) Price dispersion is positively correlated with the frequency of adjustment. 3) There is a U-Shaped relationship between price dispersion and inflation. 4) The skewness of price changes is correlated with inflation but is acyclical. We argue that standard price-setting models are inconsistent with the majority of these facts.;The final chapter of my dissertation argues that allowing for price adjustment probabilities that vary with the number of periods since all item last adjusted ('duration-dependence') provides a significantly better fit of observed price spells in CPI and grocery store micro data than the Calvo model, even if the latter is extended to incorporate item-specific adjustment probabilities. Furthermore, extending the Calvo model to match both duration-dependence and cross-item heterogeneity, as observed in the micro data, leads to an increase of 100--230% in monetary non-neutrality, even with no strategic-complementarities. As much as half of this increase is driven by duration-dependent adjustment probabilities.