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The quantitative significance of the Lucas critique

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Author Info
Preston J. Miller
William Roberds

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Abstract

Doan, Litterman, and Sims (DLS) have suggested using conditional forecasts to do policy analysis with Bayesian vector autoregression (BVAR) models. Their method seems to violate the Lucas critique, which implies that coefficients of a BVAR model will change when there is a change in policy rules. In this paper we construct a BVAR macro model and attempt to determine whether the Lucas critique is important quantitatively. We find evidence following two candidate policy rule changes of significant coefficient instability and of a deterioration in the performance of the DLS method.

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Paper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number 109.

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Date of creation: 1987
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Publication status: Published in Journal of Business and Economic Statistics (Vol.9, n.4, October 1991, pp. 361-387)
Handle: RePEc:fip:fedmsr:109

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Keywords: Forecasting ; Vector autoregression;

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  1. Preston J. Miller & William Roberds, 1992. "How little we know about deficit policy effects," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 2-11. [Downloadable!]
  2. Freeman, John R., 1996. "A Computable Equilibrium Model for the Study of Political Economy," Bulletins 7484, University of Minnesota, Economic Development Center. [Downloadable!]
  3. Preston J. Miller & Will Roberds, 1989. "How little we know about budget policy effects," Staff Report 120, Federal Reserve Bank of Minneapolis. [Downloadable!]
    Other versions:
  4. Daniel F. Waggoner & Tao Zha, 1998. "Conditional forecasts in dynamic multivariate models," Working Paper 98-22, Federal Reserve Bank of Atlanta. [Downloadable!]
    Other versions:
  5. David E. Runkle, 1989. "The U.S. economy in 1990 and 1991: continued expansion likely," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 19-26. [Downloadable!]
  6. Eric M. Leeper & Tao Zha, 1999. "Modest policy interventions," Working Paper 99-22, Federal Reserve Bank of Atlanta. [Downloadable!]
    Other versions:
  7. Preston J. Miller & Richard M. Todd, 1992. "Real effects of monetary policy in a world economy," Staff Report 154, Federal Reserve Bank of Minneapolis. [Downloadable!]
  8. Daniel M. Chin & John F. Geweke & Preston J. Miller, 2000. "Predicting turning points," Staff Report 267, Federal Reserve Bank of Minneapolis. [Downloadable!]
  9. Pierre-Yves Henin & Marie Podevin, 2002. "Assessing the Effects of Policy Changes: Lesson from the European 1992 Experience," Annales d'Economie et de Statistique, ADRES, issue 67-68, pages 15, Juillet-D. [Downloadable!]
  10. Preston J. Miller & David E. Runkle, 1989. "The U.S. economy in 1989 and 1990: walking a fine line," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 3-10. [Downloadable!]
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