Equilibrium counterfactuals
File(s)iere.12513.pdf (1.05 MB)
Published version
Author(s)
Chemla, Gilles
Hennessy, Christopher
Type
Journal Article
Abstract
We incorporate structural modellers into the economy they model. Using traditional moment-matching, they treat policy changes as zero probability (or exogenous) ”counterfactuals.” Bias occurs since real-world agents understand policy changes are positive probability events guided by modellers. Downward, upward, or sign bias occurs. Bias is illustrated by calibrating the Leland model to the 2017 tax cut. The traditional identifying assumption, constant moment partial derivative sign, is incorrect with policy optimization. The correct assumption is constant moment total derivative sign accounting for estimation-policy feedback. Model agent expectations can be updated iteratively until policy advice converges to agent expectations, with bias vanishing.
Date Issued
2021-05
Date Acceptance
2020-12-30
Citation
International Economic Review, 2021, 62 (2), pp.639-669
ISSN
0020-6598
Publisher
Wiley
Start Page
639
End Page
669
Journal / Book Title
International Economic Review
Volume
62
Issue
2
Copyright Statement
© 2021 The Authors. International Economic Review published by Wiley Periodicals LLC on behalf of the EconomicsDepartment of the University of Pennsylvania and the Osaka University Institute of Social and Economic ResearchAssociationThis is an open access article under the terms of the Creative Commons Attribution-NonCommercial License, whichpermits use, distribution and reproduction in any medium, provided the original work is properly cited and is notused for commercial purposes.
Identifier
https://onlinelibrary.wiley.com/doi/10.1111/iere.12513
Subjects
Social Sciences
Economics
Business & Economics
EXPECTATIONS
DEBT
TAXES
MODEL
14 Economics
Economics
Publication Status
Published
Date Publish Online
2021-04-23