Should Dynamic Scoring be done with Heterogeneous Agent-Based Models? Challenging the Conventional Wisdom

M Saifur Rahman ()
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M Saifur Rahman: Indiana University Bloomington

No 2008-023, CAEPR Working Papers from Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington

Abstract: Traditionally, Dynamic Scoring calculations experiments are carried out using representative agent based macroeconomic models. Existing literature does not provide any objection to this approach. In this paper, I develop a heterogeneous agent model similar to the Saver-Spenders model of Mankiw (2000). But spenders in my model are merely credit constrained and not rule-of-thumb consumers. Both groups are intertemporal optimizers because of the existence of Internal Habit Persistence. Transition path of most of the macro and fiscal variables for various tax cuts under alternative financing scheme shows pattern which are significantly different and sometimes contrasting to the representative agent model. Dynamic scoring calculations reveal a downward bias of the representative agent model. Underestimation of the dynamic response could be as large as 45%. Finally, steady state results indicate smaller impact of contractionary policies on major fiscal variables such as net tax revenue and tax base. Over all, the paper argues that the need to use heterogeneous agent based model in dynamic fiscal calculations is not only desirable, but also essential.

Keywords: Savers-spenders model; rule-of thumb consumer; intertemporal optimizers; dynamic scoring; habit persistence; alternative financing; debt financing; fiscal policy (search for similar items in EconPapers)
JEL-codes: E62 H2 H3 H6 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2008-09
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