Skip to main content
alt

Please enter a keyword and click the arrow to search the site

Or explore one of the areas below

The Lucas critique and the stability of empirical models

Journal

Journal of Applied Econometrics

Subject

Economics

Publishing details

Journal of Applied Econometrics 2010 Vol 25:1 p 177-194

Authors / Editors

Surico P;Lubik T

Biographies

Paolo Surico

Publication Year

2010

Abstract

This paper reconsiders the empirical relevance of the Lucas critique using a DSGE sticky price model in which a weak central bank response to inflation generates equilibrium indeterminacy. The model is calibrated to capture the magnitude of the historical shift in the Federal Reserve's policy rule. Using Monte Carlo simulations and a backward-looking model of aggregate supply and demand, we find that shifts in the policy rule induce breaks in both the reduced-form coefficients and the reduced-form error variances. When the instability of the reduced-form error variances is accounted for, the Lucas critique is found to be empirically relevant. Copyright © 2009 John Wiley & Sons, Ltd.

Available on ECCH

No


Select up to 4 programmes to compare

Select one more to compare
×
subscribe_image_desktop 5949B9BFE33243D782D1C7A17E3345D0

Sign up to receive our latest news and business thinking direct to your inbox

×

Sign up to receive our latest course information and business thinking

Leave your details above if you would like to receive emails containing the latest thought leadership, invitations to events and news about courses that could enhance your career. If you would prefer not to receive our emails, you can still access the case study by clicking the button below. You can opt-out of receiving our emails at any time by visiting: https://london.edu/my-profile-preferences or by unsubscribing through the link provided in our emails. View our Privacy Policy for more information on your rights.