Adaptive expectations, underparameterization and the Lucas critique
AbstractA striking implication of the replacement of adaptive expectations by Rational Expectations was the "Lucas Critique," which showed that expectation parameters, and endogenous variable dynamics, depend on policy parameters. We reconsider this issue from the vantage point of bounded rationality. Adaptive expectations, with an optimally tuned parameter, can provide a reasonable, if not fully rational, forecast method when the true process is unknown. We show that for a range of processes, monetary policy remains subject to the Lucas critique. However, there are also regimes in which the expectation parameter is locally invariant and the Lucas critique does not apply.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Monetary Economics.
Volume (Year): 53 (2006)
Issue (Month): 2 (March)
Contact details of provider:
Web page: http://www.elsevier.com/locate/inca/505566
Other versions of this item:
- George W. Evans & Garey Ramey, 2001. ""Adaptive Expectations, Underparameterization and the Lucas Critique," University of Oregon Economics Department Working Papers 2001-8, University of Oregon Economics Department, revised 01 Dec 2004.
- Evans, George W & Ramey, Garey, 2001. "Adaptive Expectations, Underparameterization and the Lucas Critique," University of California at San Diego, Economics Working Paper Series qt41f2h196, Department of Economics, UC San Diego.
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
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- Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
- George W. Evans & Seppo Honkapohja, 1993. "Adaptive forecasts, hysteresis, and endogenous fluctuations," Economic Review, Federal Reserve Bank of San Francisco, pages 3-13.
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