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Labor-Market Heterogeneity, Aggregation, and the Lucas Critique

Yongsung Chang (), Sun-Bin Kim () and Frank Schorfheide ()

No 16401, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: C11 C32 E32 E62 (search for similar items in EconPapers)
Date: 2010-09
Note: EFG ME
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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.

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