The Lucas Critique Policy Invariance and Multiple Equilibria
AbstractThe Lucas critique of econometric policy evaluation argues that the parameters of econometric models are subject to theoretical cross-equation restrictions that follow from the fact that the endogenous variables of the models are chosen optimally by forward-looking agents. In this paper, the author argues that these facts alone are insufficient to generate such restrictions. He presents an example of a model in which there exist multiple stationary rational expectations equilibria, one of which is supported by a process-invariant forecast rule. Immunity to the Lucas critique is proposed as a selection criterion in models with multiple equilibria. Copyright 1991 by The Review of Economic Studies Limited.
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Bibliographic InfoPaper provided by UCLA Department of Economics in its series UCLA Economics Working Papers with number 551.
Date of creation: 01 Mar 1989
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Web page: http://www.econ.ucla.edu/
Other versions of this item:
- Farmer, Roger E A, 1991. "The Lucas Critique, Policy Invariance and Multiple Equilibria," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 321-32, April.
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