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Robust Decision Theory And The Lucas Critique

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  • Marcellino, Massimiliano
  • Salmon, Mark

Abstract

In this paper, we reconsider the theoretical basis for the Lucas critique from the point of view of robust decision theory. We first emphasize that the Lucas critique rests on a weak theoretical paradigm in that it fails to consider the motivation for the policy change by the government and hence inconsistently assumes limited rationality by the government. When placed in a proper dynamic general equilibrium framework of a dynamic game between the government and the private sector, much of the force of the critique simply vanishes. We also reconsider the critique by adopting an alternative theoretical paradigm and notion of rationality based on robust decision theory. This view of rationality might be regarded as more relevant than the nonrobust rationality employed by Lucas and, critically, it is one in which the Lucas critique can be shown simply not to apply, provided the private sector has adopted suitably robust decision rules.

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Bibliographic Info

Article provided by Cambridge University Press in its journal Macroeconomic Dynamics.

Volume (Year): 6 (2002)
Issue (Month): 01 (February)
Pages: 167-185

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Handle: RePEc:cup:macdyn:v:6:y:2002:i:01:p:167-185_02

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Cited by:
  1. Arnulfo Rodríguez & Fidel González & Jesús R. González García, 2007. "Uncertainty about the Persistence of Cost-Push Shocks and the Optimal Reaction of the Monetary Authority," Working Papers 2007-05, Banco de México.
  2. William Brock & Steven Durlauf & Kenneth West, 2005. "Model uncertainty and policy evaluation: some theory and empirics," Proceedings, Federal Reserve Bank of San Francisco.
  3. Brock, William A. & Durlauf, Steven N., 2005. "Local robustness analysis: Theory and application," Journal of Economic Dynamics and Control, Elsevier, vol. 29(11), pages 2067-2092, November.
  4. Kenneth Kasa, 1999. "Model uncertainty, robust policies, and the value of commitment," Working Paper Series 99-14, Federal Reserve Bank of San Francisco.
  5. William A. Brock & Steven N. Durlauf, 2004. "Elements of a Theory of Design Limits to Optimal Policy," NBER Working Papers 10495, National Bureau of Economic Research, Inc.
  6. Gerlach-Kristen, Petra, 2006. "Internal and external shocks in Hong Kong: Empirical evidence and policy options," Economic Modelling, Elsevier, vol. 23(1), pages 56-75, January.
  7. Gonzalez F. & Rodriguez A. & Gonzalez-Garcia J.R., 2005. "Uncertainty about the Persistence of Periods with Large Price Shocks and the Optimal Reaction of the Monetary Authority," Computing in Economics and Finance 2005 402, Society for Computational Economics.
  8. Pataracchia, B., 2011. "Ambiguity and Volatility: Asset Pricing Implications," Discussion Paper 2011-042, Tilburg University, Center for Economic Research.
  9. Brock,W.A. & Durlauf,S.N., 2004. "Macroeconomics and model uncertainty," Working papers 20, Wisconsin Madison - Social Systems.

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