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Labor-Market Heterogeneity, Aggregation, and the Lucas Critique

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  • Chang, Yongsung
  • Schorfheide, Frank
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.

Suggested Citation

  • Chang, Yongsung & Schorfheide, Frank, 2010. "Labor-Market Heterogeneity, Aggregation, and the Lucas Critique," CEPR Discussion Papers 8039, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:8039
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Labor-Market Heterogeneity, Aggregation, and the Lucas Critique
      by Christian Zimmermann in NEP-DGE blog on 2010-10-08 08:16:08

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    Cited by:

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    2. Pesaran, M. Hashem & Smith, Ron P., 2011. "Beyond the DSGE Straitjacket," IZA Discussion Papers 5661, Institute of Labor Economics (IZA).
    3. Fernando J. Pérez Forero, 2017. "Measuring the Stance of Monetary Policy in a Time-Varying," Working Papers 102, Peruvian Economic Association.
    4. Christian Bayer & Volker Tjaden, 2016. "Large Open Economies and Fixed Costs of Capital Adjustment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 21, pages 125-146, July.
    5. Canova, Fabio & Paustian, Matthias, 2011. "Business cycle measurement with some theory," Journal of Monetary Economics, Elsevier, vol. 58(4), pages 345-361.
    6. Francisco J. Buera & Benjamin Moll, 2012. "Aggregate Implications of a Credit Crunch," NBER Working Papers 17775, National Bureau of Economic Research, Inc.

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    More about this item

    Keywords

    Aggregation; Fiscal policy; Heterogeneous agents economy; Lucas critique; Representative agent model;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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