Download This PaperMicro Shocks and Macro Blocks: Two-step Estimation of Heterogeneous Agent Models
63 Pages Posted: 4 Oct 2019 Last revised: 30 Sep 2023
Date Written: September 30, 2023
Abstract
Many macroeconomic models, including heterogeneous agent models, have a block structure that allows for multi-step estimation, where a subset of its parameters can be identified and estimated using a subset of moment conditions, independent from the other model parameters. Multi-step estimators, while less efficient in the absence of misspecification, can isolate subsets of parameters from misspecification in other parts of the model, and efficiency losses are therefore directly rewarded by robustness gains. I illustrate this in the workhorse heterogeneous household model of Aiyagari (1994) by establishing its block structure and showing how the firm-side parameters can be isolated from misspecification in the earnings process of the households. Similarly, in the workhorse heterogeneous firm model of Khan and Thomas (2008), I show that a one-step estimation procedure can overestimate the adjustment cost of capital by as much as 90 percent when omitting investment shocks from the aggregate shock process, while its two-step estimator is unaffected.
Keywords: model uncertainty, wealth and earnings inequality, parameter identification
JEL Classification: E21, E22, C32
Suggested Citation: Suggested Citation