Mitigation of the Lucas critique with stochastic control methods
AbstractLucas (In: Brunner, K., Meltzer, A.H. (Eds.), The Phillips Curve and the Labor Markets, Supplementary Series to the Journal of Monetary Economics, 1976, pp. 19â46) pointed out, that when optimization is performed on a deterministic macro model, the resulting policy may not reflect the true optimal solution. Private agents may react to announced policies and consequently model parameters will start to drift. The aim of this paper is to develop a methodology for deriving an optimal policy in the presence of rational expectations and parameter drift. This drift is captured by a stochastic optimization framework with time-varying parameters. The resulting optimal policy is capable of tracking changes in the parameters due to policy changes. A numerical example illustrates how the methodology provides a way to mitigate the effects of the Lucas critique.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Elsevier in its journal Journal of Economic Dynamics and Control.
Volume (Year): 27 (2003)
Issue (Month): 11-12 (September)
Contact details of provider:
Web page: http://www.elsevier.com/locate/jedc
Other versions of this item:
- Amman, Hans M. & Kendrick, David A., 2003. "Mitigation of the Lucas critique with stochastic control methods," Journal of Economic Dynamics and Control, Elsevier, vol. 27(11), pages 2035-2057.
- Hans Amman & David Kendrick, 2000. "Mitigation Of The Lucas Critique With Stochastic Control Methods," Computing in Economics and Finance 2000 182, Society for Computational Economics.
- C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
- E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- David Andolfatto & Paul Gomme, 1997.
"Monetary Policy Regimes and Beliefs,"
97002, University of Waterloo, Department of Economics, revised Jan 1997.
- David Andolfatto & Paul Gomme, 1997. "Monetary policy regimes and beliefs," Discussion Paper / Institute for Empirical Macroeconomics 118, Federal Reserve Bank of Minneapolis.
- David Andolfatto & Paul Gomme, 2001. "Monetary policy regimes and beliefs," Working Paper 9905, Federal Reserve Bank of Cleveland.
- David Andolfatto & Paul Gomme, 1997. "Monetary Policy Regimes and Beliefs," Cahiers de recherche CREFE / CREFE Working Papers 48, CREFE, Université du Québec à Montréal, revised Apr 2001.
- Hans M. Amman & David A. Kendrick, 1997.
"Computing the Steady State of Linear Quadratic Optimization Models with Rational Expectations,"
CARE Working Papers
9707, The University of Texas at Austin, Center for Applied Research in Economics.
- Amman, Hans M. & Kendrick, David A., 1998. "Computing the steady state of linear quadratic optimization models with rational expectations," Economics Letters, Elsevier, vol. 58(2), pages 185-191, February.
- Swamy, P. A. V. B. & Tinsley, P. A., 1980.
"Linear prediction and estimation methods for regression models with stationary stochastic coefficients,"
Journal of Econometrics,
Elsevier, vol. 12(2), pages 103-142, February.
- P.A.V.B. Swamy & P.A. Tinsley, 1976. "Linear prediction and estimation methods for regression models with stationary stochastic coefficients," Special Studies Papers 78, Board of Governors of the Federal Reserve System (U.S.).
- Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July.
- Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
- Martin Feldstein & James H. Stock, 1994.
"The Use of a Monetary Aggregate to Target Nominal GDP,"
in: Monetary Policy, pages 7-69
National Bureau of Economic Research, Inc.
- Martin Feldstein & James H. Stock, 1993. "The Use of Monetary Aggregate to Target Nominal GDP," NBER Working Papers 4304, National Bureau of Economic Research, Inc.
- Tucci, Marco P., 1997. "Adaptive control in the presence of time-varying parameters," Journal of Economic Dynamics and Control, Elsevier, vol. 22(1), pages 39-47, November.
- Amman, Hans & Kendrick, David, 1999.
"Linear-Quadratic Optimization For Models With Rational Expectations,"
Cambridge University Press, vol. 3(04), pages 534-543, December.
- Hans M. Amman & David A. Kendrick, 1997. "Linear Quadratic Optimization for Models with Rational Expectations," Tinbergen Institute Discussion Papers 97-102/2, Tinbergen Institute.
- Hans M. Amman & David A. Kendrick, 1997. "Linear Quadratic Optimization for Models with Rational Expectations," CARE Working Papers 9708, The University of Texas at Austin, Center for Applied Research in Economics.
- Benhabib, Jess & Farmer, Roger E.A., 1999. "Indeterminacy and sunspots in macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 6, pages 387-448 Elsevier.
- Wickens, Michael R, 1982. "The Efficient Estimation of Econometric Models with Rational Expectations," Review of Economic Studies, Wiley Blackwell, vol. 49(1), pages 55-67, January.
- Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
- Robert E. Lucas, Jr. & Thomas J. Sargent, 1979. "After Keynesian macroeconomics," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr.
- Hans M. Amman & David A. Kendrick, 2012. "Conjectures on the policy function in the presence of optimal experimentation," Working Papers 12-09, Utrecht School of Economics.
- Stephen J. Turnovsky, 2008.
"Stabilization Theory and Policy: 50 Years after the Phillips Curve,"
UWEC-2008-09-FC, University of Washington, Department of Economics.
- Stephen J. Turnovsky, 2011. "Stabilization Theory and Policy: 50 Years after the Phillips Curve," Economica, London School of Economics and Political Science, vol. 78(309), pages 67-88, January.
- David A. Kendrick & Hans M. Amman & Marco P. Tucci, 2008. "Learning About Learning in Dynamic Economic Models," Working Papers 08-20, Utrecht School of Economics.
- Athanasiou, George & Kotsios, Stelios, 2008. "An algorithmic approach to exchange rate stabilization," Economic Modelling, Elsevier, vol. 25(6), pages 1246-1260, November.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wendy Shamier).
If references are entirely missing, you can add them using this form.