Glossary of economics research
Results of search for Lucas critique follow:
Lucas critique:
A criticism of econometric evaluations of U.S. government policy as they
existed in 1973, made by Robert E. Lucas. "Keynesian models consisted of
collections of decision rules for consumption, investment in capital,
employment, and portfolio balance. In evaluating alternative policy rules for
the government,.... those private decision rules were assumed to be fixed....
Lucas criticized such procedures [because optimal] decision rules of private
agents are themselves functions of the laws of motion chosen by the
government.... policy evaluation procedures should take into account the
dependence of private decision rules on the government's ... policy
rule."
In Cochrane's language: "Lucas argued that policy evaluation must be
performed with models specified at the level of preferences ... and technology
[like discount factor beta and permanent consumption c* and
exogenous interest rate r], which presumably are policy invariant, rather than
decision rules which are not."
[I believe the canonical example is: what happens if government changes
marginal tax rates? Is the response of tax revenues linear in the change, or
is there a Laffer curve to the response? Thus stated, this is an empirical
question.]
Source: Sargent, 1979, Ch 14, p. 398; Cochrane, Econ 330
notes
Contexts: macro; public finance
Back to top