Chemla, Gilles; Hennessy, Christopher A. (2021), Equilibrium Counterfactuals, International Economic Review, 62, 2, p. 639-669. 10.1111/iere.12513
TypeArticle accepté pour publication ou publié
Journal nameInternational Economic Review
MetadataShow full item record
Dauphine Recherches en Management [DRM]
Hennessy, Christopher A.
London Business School
Abstract (EN)We incorporate structural modelers 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 modelers. 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.
Subjects / Keywordsstructural models; moments; policy; bias; algorithm
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