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Equilibrium Counterfactuals: Joint Estimation and Control in Structural Models​​​​​​​

Chemla, Gilles; Hennessy, Christopher A. (2018), Equilibrium Counterfactuals: Joint Estimation and Control in Structural Models​​​​​​​, University of Minnesota Finance Department Guest Seminar - Fall 2018, 2018-10, Minneapolis, United States

Type
Communication / Conférence
Date
2018
Conference title
University of Minnesota Finance Department Guest Seminar - Fall 2018
Conference date
2018-10
Conference city
Minneapolis
Conference country
United States
Metadata
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Author(s)
Chemla, Gilles
Dauphine Recherches en Management [DRM]
Hennessy, Christopher A.
London Business School
Abstract (EN)
The objective of applied structural microeconometrics is to identify policy-invariant parameters so alternative policies can be assessed. As we show, the practice of treating policy changes as zero probability "counterfactuals" violates rational expectations: Agents inside the model understand policy changes are positive probability events which the structural estimation isintended to inform. We analytically characterize the implications for moment-based parameter inference. As shown, if a policy change is optimal, inference is biased. Further, the standard identifying assumption, constant partial derivative sign, is neither necessary nor sufficient with policy control. We offer an alternative identifying assumption: constant total differential sign with inference-policy feedback. It is shown that under this assumption, rational expectations can be imposed computationally (algorithmically) to generate unbiased inference and optimal policy.The quantitative importance of these effects in applied settings is illustrated by calibrating theLeland (1994) model to the Tax Cuts and Jobs Act of 2017.
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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