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Labor-Market Heterogeneity, Aggregation, and the Lucas Critique

  • Yongsung Chang
  • Sun-Bin Kim
  • Frank Schorfheide

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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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
Date of revision:
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
Note: EFG ME
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