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Assessing the Lucas Critique in Monetary Policy Models

  • Rudebusch, Glenn D

Empirical estimates of monetary policy rules suggest that the behavior of U.S. monetary policymakers changed during the past few decades. However, for that same time period, statistical analyses of lagged representations of the economy, such as VARs, often have not rejected the null of structural stability. These two sets of empirical results appear to contradict the Lucas critique. This paper reconciles these results with the Lucas critique by showing that the apparent policy invariance of reduced forms is consistent with the magnitude of historical policy shifts and the relative insensitivity of the reduced forms of plausible forward-looking macroeconomic specifications to policy shifts.

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Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 37 (2005)
Issue (Month): 2 (April)
Pages: 245-72

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Handle: RePEc:mcb:jmoncb:v:37:y:2005:i:2:p:245-72
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  1. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
  2. Julio J. Rotemberg & Michael Woodford, 1999. "Interest Rate Rules in an Estimated Sticky Price Model," NBER Chapters, in: Monetary Policy Rules, pages 57-126 National Bureau of Economic Research, Inc.
  3. Rudebusch, G.D., 1996. "Do Measures of Monetary Policy in a VAR Make Sense?," Papers 269, Banca Italia - Servizio di Studi.
  4. Cogley, Timothy & Nason, James M, 1995. "Output Dynamics in Real-Business-Cycle Models," American Economic Review, American Economic Association, vol. 85(3), pages 492-511, June.
  5. Clarida, R. & Gali, J. & Gertler, M., 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and some Theory," Working Papers 98-01, C.V. Starr Center for Applied Economics, New York University.
  6. Roberts, John M, 1995. "New Keynesian Economics and the Phillips Curve," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 975-84, November.
  7. Oliner, Stephen D. & Rudebusch, Glenn D. & Sichel, Daniel, 1996. "The Lucas critique revisited assessing the stability of empirical Euler equations for investment," Journal of Econometrics, Elsevier, vol. 70(1), pages 291-316, January.
  8. McCallum, Bennett T. & Nelson, Edward, 1998. "Nominal Income Targeting in an Open-Economy Optimizing Model," Seminar Papers 644, Stockholm University, Institute for International Economic Studies.
  9. Carl E. Walsh, 1982. "Interest Rate Volatility and Monetary Policy," NBER Working Papers 0915, National Bureau of Economic Research, Inc.
  10. Eric Leeper & Tao Zha, 2002. "Empirical analysis of policy interventions," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  11. Rudebusch, Glenn D. & Svensson, Lars E. O., 1999. "Eurosystem Monetary Targeting: Lessons from U.S. Data," Working Paper Series 92, Sveriges Riksbank (Central Bank of Sweden).
  12. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky Information: A Model of Monetary Nonneutrality and Structural Slumps," NBER Working Papers 8614, National Bureau of Economic Research, Inc.
  13. Taylor, John B, 1989. "Monetary Policy and the Stability of Macroeconomic Relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 4(S), pages S161-78, Supplemen.
  14. 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.
  15. Fuhrer, Jeffrey C & Moore, George R, 1995. "Monetary Policy Trade-offs and the Correlation between Nominal Interest Rates and Real Output," American Economic Review, American Economic Association, vol. 85(1), pages 219-39, March.
  16. Jeffrey C. Fuhrer, 2000. "Habit Formation in Consumption and Its Implications for Monetary-Policy Models," American Economic Review, American Economic Association, vol. 90(3), pages 367-390, June.
  17. Anderson, Gary & Moore, George, 1985. "A linear algebraic procedure for solving linear perfect foresight models," Economics Letters, Elsevier, vol. 17(3), pages 247-252.
  18. Rudebusch, Glenn D, 1998. "Do Measures of Monetary Policy in a VAR Make Sense? A Reply," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 943-48, November.
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