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Labor-Market Heterogeneity, Aggregation, and the Lucas Critique

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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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File URL: http://rcer.econ.rochester.edu/RCERPAPERS/rcer_556.pdf
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Bibliographic Info

Paper provided by University of Rochester - Center for Economic Research (RCER) in its series RCER Working Papers with number 556.

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Length: 50 pages
Date of creation: Sep 2010
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Handle: RePEc:roc:rocher:556

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Postal: University of Rochester, Center for Economic Research, Department of Economics, Harkness 231 Rochester, New York 14627 U.S.A.

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Keywords: Aggregation; Fiscal Policy; Heterogeneous Agents Economy; Lucas Critique; Representative Agent Models.;

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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. Hashem M. Pesaran & Ron P. Smith, 2011. "Beyond the DSGE Straitjacket," CESifo Working Paper Series 3447, CESifo Group Munich.
  2. Marios Karabarbounis, 2012. "Heterogeneity in Labor Supply Elasticity and Optimal Taxation," 2012 Meeting Papers 655, Society for Economic Dynamics.
  3. Canova, Fabio & Paustian, Matthias, 2011. "Business cycle measurement with some theory," Journal of Monetary Economics, Elsevier, vol. 58(4), pages 345-361.
  4. Francisco J. Buera & Benjamin Moll, 2012. "Aggregate Implications of a Credit Crunch," NBER Working Papers 17775, National Bureau of Economic Research, Inc.

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