Skip to main content
alt

Please enter a keyword and click the arrow to search the site

Or explore one of the areas below

Equilibrium Counterfactuals

Journal

International Economic Review

Subject

Finance

Publishing details

International Economic Review 2021 Vol 62:2 p 639-669

Authors / Editors

Hennessy C;Chemla G

Biographies

Christopher Hennessy

Publication Year

2021

Abstract

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.

Available on ECCH

No


Select up to 4 programmes to compare

Select one more to compare
×
subscribe_image_desktop 5949B9BFE33243D782D1C7A17E3345D0

Sign up to receive our latest news and business thinking direct to your inbox

×

Sign up to receive our latest course information and business thinking

Leave your details above if you would like to receive emails containing the latest thought leadership, invitations to events and news about courses that could enhance your career. If you would prefer not to receive our emails, you can still access the case study by clicking the button below. You can opt-out of receiving our emails at any time by visiting: https://london.edu/my-profile-preferences or by unsubscribing through the link provided in our emails. View our Privacy Policy for more information on your rights.