Chapter 8 Micro data and general equilibrium models

Dynamic general equilibrium models are required to evaluate policies applied at the national level. To use these models to make quantitative forecasts requires knowledge of an extensive array of parameter values for the economy at large. This essay describes the parameters required for different economic models, assesses the discordance between the macromodels used in policy evaluation and the microeconomic models used to generate the empirical evidence. For concreteness, we focus on two general equilibrium models: the stochastic growth model extended to include some forms of heterogeneity and the overlapping generations model enriched to accommodate human capital formation.