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The quantitative significance of the Lucas critique

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  • Preston J. Miller
  • William Roberds

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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  • Preston J. Miller & William Roberds, 1987. "The quantitative significance of the Lucas critique," Staff Report 109, Federal Reserve Bank of Minneapolis.
  • Handle: RePEc:fip:fedmsr:109
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    Cited by:

    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.
    2. 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.
    3. Daniel M. Chin & John F. Geweke & Preston J. Miller, 2000. "Predicting turning points," Staff Report 267, Federal Reserve Bank of Minneapolis.
    4. Leeper, Eric M. & Zha, Tao, 2003. "Modest policy interventions," Journal of Monetary Economics, Elsevier, vol. 50(8), pages 1673-1700, November.
    5. Daniel F. Waggoner & Tao Zha, 1999. "Conditional Forecasts In Dynamic Multivariate Models," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 639-651, November.
    6. Dan Chin & John Geweke & Preston Miller, 2000. "Predicting Turning Points: Technical Paper 2000-3," Working Papers 13337, Congressional Budget Office.
    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.
    8. Arturo Estrella & Jeffrey C. Fuhrer, 2003. "Monetary Policy Shifts and the Stability of Monetary Policy Models," The Review of Economics and Statistics, MIT Press, vol. 85(1), pages 94-104, February.
    9. Miller, Preston J. & Todd, Richard M., 1995. "Real effects of monetary policy in a world economy," Journal of Economic Dynamics and Control, Elsevier, vol. 19(1-2), pages 125-153.
    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.
    11. Freeman, John R., 1996. "A Computable Equilibrium Model for the Study of Political Economy," Bulletins 7484, University of Minnesota, Economic Development Center.
    12. Preston J. Miller & William Roberds, 1989. "How little we know about budget policy effects," FRB Atlanta Working Paper 89-4, Federal Reserve Bank of Atlanta.
    13. repec:adr:anecst:y:2002:i:67-68:p:16 is not listed on IDEAS

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    Keywords

    Forecasting ; Vector autoregression;

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