Skip to main content

Research Repository

See what's under the surface

DSGE models and the Lucas Critique. A historical appraisal

Sergi, F.

Authors



Abstract

This contribution to the history of the economic thought aims at describing how “Econometric Policy Evaluation: A Critique” (Lucas, 1976) has been interpreted through four decades of debates. This historical appraisal clarifies how Lucas’s argument is currently understood and discussed within the dynamic stochastic general equilibrium (DSGE) approach.
The article illustrates how two opposite interpretations of the Lucas Critique arose in the early 1980s. On the one hand, a theoretical interpretation” has been championed by the real business cycle (RBC) approach; on the other hand, an “empirical interpretation” has been advocated by Keynesians. Both interpretations can be understood as addressing a common question: Do microfoundations imply parameters’ stability? Following the RBC theoretical interpretation, microfoundations do imply stability; conversely, for Keynesians, parameters’ stability (or instability) should be supported by econometric evidence rather than theoretical considerations. Furthermore, the article argues that the DSGE approach represent a fragile compromise between these two opposite interpretations of Lucas (1976). This is especially true for the recent literature criticizing the DSGE models for being vulnerable to the Lucas Critique.

Publication Date Oct 12, 2018
Peer Reviewed Not Peer Reviewed
Institution Citation Sergi, F. (2018). DSGE models and the Lucas Critique. A historical appraisal
Keywords DSGE models, Lucas Critique, microfoundations
Related Public URLs http://www2.uwe.ac.uk/faculties/BBS/Documents/1806-%20DSGE%20Models%20and%20the%20Lucas%20Critique%20(WP).pdf

Files








You might also like



Downloadable Citations