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Approximate Aggregation ∗

This paper revisits the approximate aggregation result of Krusell and Smith (1998). I find that the model – the stochastic growth model with uninsurable idiosyncratic employment shocks – produces distributions which feature independent moments. Higher-order moments do not influence nor are they influenced by the mean, so that forecasting prices can be done using only aggregate wealth. In addition, allowing for different information sets for different households does not affect the result. Households who use information that is not quantitatively important for forecasting prices (but which is important statistically) do not systematically get wealthier over time, showing that it is unlikely that any self-fulfilling equilibria are present. I then explore some variants in which the marginal propensity to consume out of wealth is heterogeneous in the cross-section. I find that, for the models considered, the absence of time variation in this cross-sectional distribution preserves the approximate aggregation result.