Labor-market heterogeneity, aggregation, and the Lucas critique
Author | : Yongsung Chang |
Publisher | : |
Total Pages | : 49 |
Release | : 2010 |
ISBN-10 | : OCLC:731172610 |
ISBN-13 | : |
Rating | : 4/5 (10 Downloads) |
Book excerpt: 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.