Simple Tests of Distributional Effects on Macroeconomic Equations

Abstract

The presence of distributional effects in macroeconomic equations is shown to coincide with nonlinearity in micro behavioral relationships. Parameters estimated with aggregate data, as in representative agent models, contain distributional biases that are not measurable using aggregate data alone. Tests for distributional effects and other measures of the extent of aggregation problems are derived using distributional data observed over time. Significant distributional effects are noted for a model of annual aggregate U.S. commodity expenditure data. A static model that accommodates individual heterogeneity is found to be statistically equivalent to a simply dynamic model that accommodates first-order autocorrelation.