The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Lucas Critique

  • Lars Ljungqvist
Reference work entry
DOI: https://doi.org/10.1057/978-1-349-95189-5_2784

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.

Keywords

Expectations Lucas Critique Macroeconomic policy evaluation Optimization behaviour Phillips curve Rational expectations Rational expectations econometrics Real vs. nominal shocks 
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Copyright information

© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Lars Ljungqvist
    • 1
  1. 1.