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Labor-Market Heterogeneity, Aggregation, and the Lucas Critique

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  • Yongsung Chang
  • Sun-Bin Kim
  • Frank Schorfheide

Abstract

This paper assesses biases in policy predictions due to the lack of invariance of "structural'' parameters in representative-agent models. We simulate data under various fiscal policy regimes from a heterogeneous-agents economy with incomplete asset markets and indivisible labor supply. Imperfect aggregation manifests itself through preference shocks in the estimated representative-agent model. Preference and technology parameter estimates are not invariant with respect to policy changes. As a result, the bias in the representative-agent model's policy predictions is large compared to the length of predictive intervals that reflect parameter uncertainty.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16401.

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Date of creation: Sep 2010
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Publication status: published as “Labor Market Heterogeneity and the Lucas Critique,” joint with Yongsung Chang (Rochester), and Sun - Bin Kim (Yonsei University), Journal of the European Economic Association , 11(S1), 2013, 193 - 220.
Handle: RePEc:nbr:nberwo:16401

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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Labor-Market Heterogeneity, Aggregation, and the Lucas Critique
    by Christian Zimmermann in NEP-DGE blog on 2010-10-08 03:16:08
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
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Cited by:
  1. Pesaran, M. Hashem & Smith, Ron P., 2011. "Beyond the DSGE Straitjacket," IZA Discussion Papers 5661, Institute for the Study of Labor (IZA).
  2. Canova, Fabio & Paustian, Matthias, 2011. "Business cycle measurement with some theory," Journal of Monetary Economics, Elsevier, vol. 58(4), pages 345-361.
  3. Francisco J. Buera & Benjamin Moll, 2012. "Aggregate Implications of a Credit Crunch," NBER Working Papers 17775, National Bureau of Economic Research, Inc.
  4. Marios Karabarbounis, 2012. "Heterogeneity in Labor Supply Elasticity and Optimal Taxation," 2012 Meeting Papers 655, Society for Economic Dynamics.

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