Science makes progress through interdisciplinarity. Economists have long recognized this by venturing with their methods into other fields, something I have repeatedly documented on this blog. And Economists also borrow techniques from other fields to their advantage.
Fabio Tramontana and Mauro Gallegati looked at the biology literature and stumbled on the concept of compartments. The idea is to attribute populations to bins in such a way that they are rather homogeneous within a bin, define the transitions between the bins and then embed this into a model. Tramontana and Gallegati then proceed to demonstrate this with a model of a firm with linear technology and linear stochastic demand, and the firm needs financing from a bank and may go bankrupt. They assign firms to a whooping three size classes and then simulate something.
There is a clique in Ancona (Italy) that decided in 1995 that representative agent macro was inappropriate. That is correct, depending on the particular question. But subsequently, they decided to ignore all the work that was done on heterogeneous agents and continue to this day to claim that macro is all about representative agents. Yet, the current literature is full of models where agents are heterogeneous and, gasp, categorized in bins. From the top of my head, individuals have been distinguished by age, gender, marital status, employment, education, health, wealth, number of children, and nationality. Firms have been categorized by assets, access to credit, sector, leverage, labor intensity, and age. And I am surely forgetting some.
It looks like Tramontana and Gallegati should be peeking a little bit out of their rather hermetic compartment.
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