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Modern Macroeconomics in Practice: How Theory is Shaping Policy

  • Patrick Kehoe
  • Varadarajan V. Chari

Theoretical advances in macroeconomics made in the last three decades have had a major influence on macroeconomic policy analysis. Moreover, over the last several decades, the United States and other countries have undertaken a variety of policy changes that are precisely what macroeconomic theory of the last 30 years suggests. The three key developments that have shaped macroeconomic policy analysis are the Lucas critique of policy evaluation due to Robert Lucas, the time inconsistency critique of discre-tionary policy due to Finn Kydland and Edward Prescott, and the development of quantitative dynamic stochastic general equilibrium models following Finn Kydland and Edward Prescott.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12476.

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Date of creation: Aug 2006
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Publication status: published as V. V. Chari & Patrick J. Kehoe, 2006. "Modern Macroeconomics in Practice: How Theory Is Shaping Policy," Journal of Economic Perspectives, American Economic Association, vol. 20(4), pages 3-28, Fall.
Handle: RePEc:nbr:nberwo:12476
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