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Labor-Market Heterogeneity, Aggregation, and the Lucas Critique

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  • Chang, Yongsung
  • Schorfheide, Frank

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.

Suggested Citation

  • Chang, Yongsung & Schorfheide, Frank, 2010. "Labor-Market Heterogeneity, Aggregation, and the Lucas Critique," CEPR Discussion Papers 8039, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:8039
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    References listed on IDEAS

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    Citations

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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. Fernando J. Pérez Forero, 2017. "Measuring the Stance of Monetary Policy in a Time-Varying," Working Papers 2017-102, Peruvian Economic Association.
    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.

    More about this item

    Keywords

    Aggregation; Fiscal Policy; Heterogeneous Agents Economy; Lucas Critique; Representative Agent Model;

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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