Labor Market Heterogeneity Aggregation And The Lucas Critique
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Labor-market heterogeneity, aggregation, and the Lucas critique
Author | : Yongsung Chang |
Publisher | : |
Total Pages | : 49 |
Release | : 2010 |
Genre | : Economic policy |
ISBN | : |
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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.