DP8039 Labor-Market Heterogeneity, Aggregation, and the Lucas Critique
|Author(s):||Yongsung Chang, Frank Schorfheide|
|Publication Date:||October 2010|
|Keyword(s):||Aggregation, Fiscal Policy, Heterogeneous Agents Economy, Lucas Critique, Representative Agent Model|
|JEL(s):||C11, C32, E32, E62|
|Programme Areas:||International Macroeconomics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=8039|
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.