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Macroeconomics Workshop - Martin Beraja

Thu, 04/13/2017 - 11:40am

Martin Beraja

Princeton University

498 Uris Hall

"Counterfactual Equivalence in Macroeconomics"

Counterfactuals in structural models are the leading paradigm for analyzing policy rule changes because they are immune to Lucas Critique. However, they are less credible whenever they lack robustness to variations in primitives across models, which is typically hard to check. Relatedly, researchers building models have to make difficult choices regarding which mechanisms are relevant for analyzing particular policy rules. I propose a novel method to tackle these and other problems in macroeconomics. It rests on the insight that many models which are well approximated by a linear representation are both observationally equivalent under a benchmark policy and yield an identical counterfactual equilibrium under an alternative policy.  Characterizing a set  of models that satisfy this principle of Counterfactual Equivalence simply requires describing whether their equilibrium equations satisfy a number of linear restrictions. I illustrate the principle's usefulness in several applications, including: (1) quantifying how fiscal unions contribute to regional stabilization, (2) analyzing which features of search models of the labor market are relevant when studying unemployment benefits policy rules, and (3) falsifying a set of New Keynesian models using Volcker's monetary policy change as an experiment.

Event Categories: Macroeconomics