Assessing the accuracy of the aggregate law of motion in models with heterogeneous agents
| Authors | |
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| Publication date | 2010 |
| Journal | Journal of Economic Dynamics & Control |
| Volume | Issue number | 34 | 1 |
| Pages (from-to) | 79-99 |
| Organisations |
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| Abstract | This paper shows that the R2 and the standard error have fatal flaws and are inadequate accuracy tests. Using data from a Krusell-Smith economy, I show that approximations for the law of motion of aggregate capital, for which the true standard deviation of aggregate capital is up to 14% (119%) higher than the implied value and which are thus clearly inaccurate, can have an R2 as high as 0.9999 (0.99). Key in generating a more powerful test is that predictions of the aggregate law of motion are not updated with the aggregated simulated individual data. |
| Document type | Article |
| Language | English |
| Published at |
https://doi.org/10.1016/j.jedc.2008.12.009
(Final published version)
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