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Policy implications of the Lucas Critique empirically tested along the global financial crisis

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  • Karimova, Amira
  • Simsek, Esra
  • Orhan, Mehmet

Abstract

This study is the first attempt to facilitate the substantial change in post-crisis monetary policy of the Fed to test the validity of Lucas Critique toward exploring implications of such changes for policymaking. Global financial crisis, asking for fundamental regime alterations presented an invaluable opportunity to test the empirical validity of Lucas Critique. We make use of quarterly US data over 1990–2015 to test for superexogeneity, the rejection of which lends support to Lucas Critique. We define the marginal models for wealth, GDP and Treasury Bill rate to construct the conditional model of money demand following Hendry (1988). Our results reject superexogeneity of the policies and report the support for Lucas Critique. We discuss about the details and consequences of the monetary policy followed to suggest arguments to prolonging debates on policy discussions.

Suggested Citation

  • Karimova, Amira & Simsek, Esra & Orhan, Mehmet, 2020. "Policy implications of the Lucas Critique empirically tested along the global financial crisis," Journal of Policy Modeling, Elsevier, vol. 42(1), pages 153-172.
  • Handle: RePEc:eee:jpolmo:v:42:y:2020:i:1:p:153-172
    DOI: 10.1016/j.jpolmod.2019.06.003
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    More about this item

    Keywords

    Lucas Critique; Monetary policy; Superexogeneity; Invariance; Rational expectations;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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