Lucas critique

Lars Ljungqvist
From The New Palgrave Dictionary of Economics, Second Edition, 2008
Edited by Steven N. Durlauf and Lawrence E. Blume
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Abstract

The ‘Lucas critique’ is a criticism of econometric policy evaluation procedures that fail to recognize that optimal decision rules of economic agents vary systematically with changes in policy. In particular, it criticizes using estimated statistical relationships from past data to forecast the effects of adopting a new policy, because the estimated regression coefficients are not invariant but will change along with agents’ decision rules in response to a new policy. A classic example of this fallacy was the erroneous inference that a regression of inflation on unemployment (the Phillips curve) represented a structural trade-off for policy to exploit.
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How to cite this article

Ljungqvist, Lars. "Lucas critique." The New Palgrave Dictionary of Economics. Second Edition. Eds. Steven N. Durlauf and Lawrence E. Blume. Palgrave Macmillan, 2008. The New Palgrave Dictionary of Economics Online. Palgrave Macmillan. 24 July 2017 <http://www.dictionaryofeconomics.com/article?id=pde2008_L000159> doi:10.1057/9780230226203.1000

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