Labor-Market Heterogeneity, Aggregation, and the Lucas Critique

Yongsung Chang and Frank Schorfheide

No 8039, CEPR Discussion Papers from Centre for Economic Policy Research

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.

Keywords: Aggregation; Fiscal policy; Heterogeneous agents economy; Lucas critique; Representative agent model (search for similar items in EconPapers)
JEL-codes: C11 C32 E32 E62 (search for similar items in EconPapers)
Date: 2010-10
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Citations: View citations in EconPapers (3)

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Related works:
Working Paper: Labor-Market Heterogeneity, Aggregation, and the Lucas Critique (2010)
Working Paper: Labor-Market Heterogeneity, Aggregation, and the Lucas Critique (2010)
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