Aggregating Rational Expectations Models in the Presence of Unobserved Micro Heterogeneity

Abstract:     
Our paper addresses the correction of the aggregation bias in linear rational expectations models when there is some unobserved micro-parameter heterogeneity and only macro data are available. Starting from Lewbel (1994), we propose two new consistent estimators, which rely on a exible parametric specification of the cross-sectional parameter distributions and account for the dependence across coefficients inherent in such models. A Monte-Carlo study reveals that the nite-sample and asymptotic properties of the proposed estimators correct the aggregation bias found with the maximum-likelihood and generalized-method-of-moments approaches. As a by-product, we can also infer the cross-sectional distribution of the parameters. Finally, we eassess the empirical evidence about the New Keynesian Phillips curve and explain the apparent discrepancy between micro- and macro-based estimates of the average persistence of inflation.

Number of Pages in PDF File: 57

Keywords: aggregation, rational expectations models, heterogeneity

JEL Classification: C13, C2, E2

working papers series