Labor-Market Heterogeneity, Aggregation, and the Lucas Critique

Yongsung Chang, Sun-Bin Kim and Frank Schorfheide

No 556, RCER Working Papers from University of Rochester - Center for Economic Research (RCER)

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 Models. (search for similar items in EconPapers)
Pages: 50 pages
Date: 2010-09
New Economics Papers: this item is included in nep-cba and nep-dge
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Citations: View citations in EconPapers (7)

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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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