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Labor-Market Heterogeneity, Aggregation, and the Policy-(In)variance of DSGE Model Parameters

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Author Info

  • Yongsung Chang

    () (University of Rochester)

  • Sun-Bin Kim

    () (Yonsei University)

  • Frank Schorfheide

    () (University of Pennsylvania)

Abstract

Data from a heterogeneous-agents economy with incomplete asset markets and indivisible labor supply are simulated under various fiscal policy regimes and an approximating representative-agent model is estimated. Preference and technology parameter estimates of the representative-agent model are not invariant to policy changes and the bias in the representative-agent model’s policy predictions is large compared to predictive intervals that reflect parameter uncertainty. Since it is not always feasible to account for heterogeneity explicitly, it is important to recognize the possibility that the parameters of a highly aggregated model may not be invariant with respect to policy changes.

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File URL: http://rcer.econ.rochester.edu/RCERPAPERS/rcer_566.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 566.

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Length: 55 pages
Date of creation: Sep 2011
Date of revision:
Handle: RePEc:roc:rocher:566

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

Related research

Keywords: Aggregation; DSGE Models; Fiscal Policy; Heterogeneous-Agents Economy; Policy Predictions; Representative-Agent Models;

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  1. Labor-Market Heterogeneity, Aggregation, and the Policy-(In)variance of DSGE Model Parameters
    by Christian Zimmermann in NEP-DGE blog on 2011-10-03 13:18:34
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Cited by:
  1. Frank Schorfheide, 2012. "EconomicDynamics Interviews Frank Schorfheide on DSGE Model Estimation," EconomicDynamics Newsletter, Review of Economic Dynamics, vol. 13(2), April.

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