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Equilibrium counterfactuals

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Title: Equilibrium counterfactuals
Authors: Chemla, G
Hennessy, C
Item 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.
Issue Date: May-2021
Date of Acceptance: 30-Dec-2020
URI: http://hdl.handle.net/10044/1/87279
DOI: 10.1111/iere.12513
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.
Keywords: Social Sciences
Business & Economics
14 Economics
Publication Status: Published
Online Publication Date: 2021-04-23
Appears in Collections:Imperial College Business School

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