Labor-Market Heterogeneity, Aggregation, and the Policy-(In)variance of DSGE Model Parameters

Yongsung Chang, Sun-Bin Kim and Frank Schorfheide

No 566, RCER Working Papers from University of Rochester - Center for Economic Research (RCER)

Abstract: Data from a heterogeneous-agents economy with incomplete asset markets and indivisible labor supply are simulated under various fiscal policy regimes and an approximating representative-agent model is estimated. Preference and technology parameter estimates of the representative-agent model are not invariant to policy changes and the bias in the representative-agent model’s policy predictions is large compared to predictive intervals that reflect parameter uncertainty. Since it is not always feasible to account for heterogeneity explicitly, it is important to recognize the possibility that the parameters of a highly aggregated model may not be invariant with respect to policy changes.

Keywords: Aggregation; DSGE Models; Fiscal Policy; Heterogeneous-Agents Economy; Policy Predictions; Representative-Agent Models (search for similar items in EconPapers)
JEL-codes: C11 C32 E32 E62 (search for similar items in EconPapers)
Pages: 55 pages
Date: 2011-09
New Economics Papers: this item is included in nep-cba and nep-dge
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: LABOR-MARKET HETEROGENEITY, AGGREGATION, AND POLICY (IN)VARIANCE OF DSGE MODEL PARAMETERS (2013)
Working Paper: Labor-Market Heterogeneity, Aggregation, and the Policy-(In)variance of DSGE Model Parameters (2012)
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