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Equilibrium Counterfactuals

Chemla, Gilles; Hennessy, Christopher A. (2021), Equilibrium Counterfactuals, International Economic Review, 62, 2, p. 639-669. 10.1111/iere.12513

Type
Article accepté pour publication ou publié
Date
2021
Journal name
International Economic Review
Volume
62
Number
2
Publisher
Wiley
Pages
639-669
Publication identifier
10.1111/iere.12513
Metadata
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Author(s)
Chemla, Gilles
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 / Keywords
structural models; moments; policy; bias; algorithm
JEL
C62 - Existence and Stability Conditions of Equilibrium
D00 - General
H00 - General
G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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