A note on aggregation and the lucas critique

Michael Reiter

Research output: Contribution to journalArticle

Abstract

The paper investigates the effects of aggregation on different macroeconomic modelling strategies. This is done within the framework of a small example economy, where all households solve the same intertemporal consumption problem, but with different parameters of the utility functions and different exogenous income processes. Three models are fitted to the aggregate data: a representative agent rational expectations model, a simple version of the permanent income hypothesis, and a time series model. If the economic environment is kept stable, the three approaches perform similarly well. However, the representative agent model stands up to the Lucas critique better than its competitors, despite the aggregation error. Unlike the other models, it never gives completely wrong forecasts even after an exogenous change in income processes.

Original languageEnglish (US)
Pages (from-to)309-321
Number of pages13
JournalBulletin of Economic Research
Volume50
Issue number4
DOIs
StatePublished - 1998

ASJC Scopus subject areas

  • Economics and Econometrics

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