Approximate aggregation revisited: higher moments do matter

Andrea Giusto ()

Applied Economics Letters, 2015, vol. 22, issue 14, 1138-1143

Abstract: This article addresses the 'approximate aggregation' result by Krusell and Smith (1998) who show that in a heterogeneous-agent model it is possible to obtain near-perfect forecasts disregarding distributional information. While this fact is generally interpreted causally, the forecasting model is misspecified and thus unfit for inference. Approximate aggregation does not hold in the baseline economy of Krusell and Smith (1998) when inferences are drawn from an econometric model showing no evidence of misspecification: the higher moments of the wealth distribution are important for the aggregate dynamics.

Date: 2015
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DOI: 10.1080/13504851.2015.1011302

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