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DSGE Models and the Lucas critique

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  • Samuel Hurtado

    (Banco de España)

Abstract

Modern DSGE models are microfounded and have deep parameters that should be invariant to changes in economic policy, so in principle they are not subject to the Lucas critique. But the literature has already established that misspecification issues also cause parameter instability after policy changes in DSGE models. This paper will look at the implications of parameter shifts for econometric policy evaluation, to see whether policy advice derived from DSGE models would have differed fundamentally from that which the policymakers of the 1970s derived from their reduced-form Phillips curves. The results show drift in most parameters, including those that are supposedly structural (such as the share of capital in production, habits or the elasticity of labor supply to the real wage), and major shifts in the impulse response functions derived from the real-time estimation of the model. After the expansionary monetary shocks of the early 1970s, a standard DSGE model would have behaved very similarly to an old-style Phillips curve, with marked shifts in parameter values and impulse response functions.

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File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/13/Fich/dt1310e.pdf
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Bibliographic Info

Paper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 1310.

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Length: 21 pages
Date of creation: Aug 2013
Date of revision:
Handle: RePEc:bde:wpaper:1310

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Keywords: Macroeconomics; DSGE; Lucas Critique;

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  1. Samuel Hurtado, 2013. "DSGE Models and the Lucas critique," Banco de Espa�a Working Papers 1310, Banco de Espa�a.
  2. Aitor Lacuesta & Sergio Puente & Ernesto Villanueva, 2011. "The schooling response to a sustained increase in low-skill wages: evidence from Spain 1989-2009," Banco de Espa�a Working Papers 1208, Banco de Espa�a.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. The Lucas Critique, DSGE models and the Phillips Curve
    by Economic Logician in Economic Logic on 2013-09-26 14:34:00
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Cited by:
  1. Chatterjee, Sidharta, 2014. "Equilibrium Models of Macroeconomic Science: What to Look For in (DSGE) Models?," MPRA Paper 53893, University Library of Munich, Germany.
  2. Samuel Hurtado, 2013. "DSGE Models and the Lucas critique," Banco de Espa�a Working Papers 1310, Banco de Espa�a.

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