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Testing for the Lucas Critique: A Quantitative Investigation

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  • Lindé, Jesper

    ()
    (Research Department)

Abstract

In this paper, I try to shed some new light on the "puzzle" why the Lucas critique, believed to be important by most economists, seems to have received very little empirical support. I use a real business cycle model to verify that the Lucas critique is quantitatively important in theory, and to examine the properties of the super exogeneity test, which is used to detect the applicability of the Lucas critique in practice. The results suggest that the super exogeneity test is not capable of detecting the relevance of Lucas critique in practice in small samples.

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Bibliographic Info

Paper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 311.

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Length: 33 pages
Date of creation: 05 Mar 1999
Date of revision: 09 Mar 1999
Handle: RePEc:hhs:hastef:0311

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Keywords: Lucas critique; real business cycle model; super exogeneity test; Taylor rules; money demand; consumption function;

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References

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  1. Lars E. O. Svensson, 1996. "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," NBER Working Papers 5797, National Bureau of Economic Research, Inc.
  2. Lucas, Robert E., 1988. "Money demand in the United States: A quantitative review," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 29(1), pages 137-167, January.
  3. Fregert, Klas & Jonung, Lars, 1998. "Monetary Regimes And Endogenous Wage Contracts: Sweden 1908-1995," Working Papers 1998:3, Lund University, Department of Economics, revised 21 Apr 1999.
  4. Glenn D. Rudebusch & Lars E. O. Svensson, 1998. "Policy rules for inflation targeting," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  5. 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.
  6. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November.
  7. Engle, Robert F. & Hendry, David F., 1993. "Testing superexogeneity and invariance in regression models," Journal of Econometrics, Elsevier, vol. 56(1-2), pages 119-139, March.
  8. Thomas F. Cooley & Gary D. Hansen, 1987. "The Inflation Tax in a Real Business Cycle Model," UCLA Economics Working Papers 496, UCLA Department of Economics.
  9. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
  10. Ball, Laurence, 1999. "Efficient Rules for Monetary Policy," International Finance, Wiley Blackwell, vol. 2(1), pages 63-83, April.
  11. Jeffrey C. Fuhrer, 1995. "The [un]importance of forward-looking behavior in price specifications," Working Papers 95-6, Federal Reserve Bank of Boston.
  12. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  13. Bennett T. McCallum, 1984. "Monetarist Rules in the Light of Recent Experience," NBER Working Papers 1277, National Bureau of Economic Research, Inc.
  14. Mccallum, Bennet T., 1988. "Robustness properties of a rule for monetary policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 29(1), pages 173-203, January.
  15. King, Robert G., 1988. "Money demand in the United States: A quantitative review," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 29(1), pages 169-172, January.
  16. Goldfeld, Stephen M. & Sichel, Daniel E., 1990. "The demand for money," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 1, chapter 8, pages 299-356 Elsevier.
  17. Lucas, Robert E, Jr, 1975. "An Equilibrium Model of the Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 83(6), pages 1113-44, December.
  18. Engle, Robert F & Hendry, David F & Richard, Jean-Francois, 1979. "Exogeneity," The Warwick Economics Research Paper Series (TWERPS) 162, University of Warwick, Department of Economics.
    • Engle, Robert F & Hendry, David F & Richard, Jean-Francois, 1983. "Exogeneity," Econometrica, Econometric Society, vol. 51(2), pages 277-304, March.
    • ENGLE, Robert F. & HENDRY, David F. & RICHARD, Jean-François, . "Exogeneity," CORE Discussion Papers RP -516, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  19. Lucas, Robert E., 1977. "Understanding business cycles," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 5(1), pages 7-29, January.
  20. Neil R. Ericsson & John S. Irons, 1995. "The Lucas critique in practice: theory without measurement," International Finance Discussion Papers 506, Board of Governors of the Federal Reserve System (U.S.).
  21. Arturo Estrella & Jeffrey C. Fuhrer, 1999. "Are "deep" parameters stable? the Lucas critique as an empirical hypothesis," Working Papers 99-4, Federal Reserve Bank of Boston.
  22. Gary D. Hansen & Edward C. Prescott, 1992. "Recursive methods for computing equilibria of business cycle models," Discussion Paper / Institute for Empirical Macroeconomics 36, Federal Reserve Bank of Minneapolis.
  23. Christopher A. Sims, 1982. "Policy Analysis with Econometric Models," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 13(1), pages 107-164.
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  1. Quantitative Macroeconomics and Real Business Cycles (QM&RBC)

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