Through careful methodological analysis, this book argues that modern macroeconomics has completely overlooked the aggregate nature of the data. In Part I, the authors test and reject the homogeneity assumption using disaggregate data. In Part II, they demonstrate that apart from random flukes, cointegration unidirectional Granger causality and restrictions on parameters do not survive aggregation when heterogeneity is introduced. They conclude that the claim that modern macroeconomics has solid microfoundations is unwarranted. However, 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.

Introduction
List of Symbols
Aggregation of Scalar Processes
Common and Idiosyncratic Components
The Model for the Individual Variables
A Large Number of Agents
Large Numbers: a General Result
A Continuum of Agents
Autoregressive Relationships among the Microvariables
Bibliographic Notes
How Many Common Shocks?
Perfect Correlation
Pairwise Singularity
Pairwise Cointegration
How Many Common Shocks?
Dynamic Principal Components
Further Empirical Evidence
Bibliographic Notes
The Regional Model
From the Individual to the Regional Model
Specification of the Regional Model
Estimation and Diagnostic Checking
Identification of the Common Shocks
Bibliographic Notes
Aggregating the Common Components
The Wold Representation of the Macrovariable
Identification of the Microparameters
Bibliographic Notes
Aggregation of Economic Models
Reformulation of Standard Representative-Agent Models
Life Cycle, Permanent Income under Rational Expectations
A Labor Demand Schedule under Rational Expectations
Consumption and Income Again: Error Correction Mechanisms
Rules of Thumb. Non-Fully Rational, Routinized Behaviors
Structural VAR Models. General Equilibrium
Bibliographic Notes
The Disaggregated Model
The Microparameter Space
The Micromodel
The Population Space
The Disaggregated Model
Further Comments on the Micromodel. Analytic Functions
Negligible Subsets. The Alternative Principle
Non-Redundancy of the Common Shocks
Dependent and Independent Variables
The Micromodel Coefficients as Analytic Functions
Bibliographic Notes
The Aggregate Model
Definition of the Aggregate Model
Dropping the Idiosyncratic Component
Aggregation of the DI Model
Macrovariables in the Micromode
General Equilibrium
Populations and Distributions over [TYPE IN SYMBOL]
Restrictions and Subsets of the Population Space
Bibliographic Notes
The Rank of the Aggregate Vector
General Statements
The Two-Point Example
A Theorem for the DI Model
More on the Subset of [TYPE IN SYMBOL] where the Model is Singular
Bibliographic Notes
Cointegration
General Results
Log-Linear Models
An Observation on the Alternative Principle
Bibliographic Notes
An Extension of the Alternative Principle
From the Spectral Density to the Wold Representation
An Extension of the Alternative Principle
Bibliographic Notes
Granger Causality
General Results
Discussion of the Two-Point Example
Bibliographic Notes
Wold Representation: VAR and ARMAX Models
Var Models
Fundamentalness
ARMAX Models
Interpretation. Overidentifying Restrictions
Bibliographic Notes
Macroeconomic Applications
Permanent Income and the Error Correction Mechanism
Excess Sensitivity
Cointegration of Consumption and Total Income
Singularity
Consumption Volatility
Complete Information and the Representative Agent
An Explanation for Sensitivity and Smoothness
Micro and Macro Singularity
Reconciling PIH and ECM
An Empirical Exercise
Bibliographic Notes
Disaggregating the Business Cycle
The Number of Common Shocks
Identification of the Common Technology Shock
Estimation of the Sectoral Model
Diagnostic Checking, Data Sources, and Data Treatment
SummaryConclusions
Appendix. Elements of Discrete Time Series Theory
Orthogonal Projections
The Wold Representation
MA Representations of Regular Processes
Non-Fundamentalness and Prediction
Scalar ARMA Processes
Vector Processes
The Spectral Density
Granger Causality and Sims's Theorem
Bibliographic
Notes
References
Index
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