ABSTRACT OF PAPER
Title: Econometric Methods and Problems in New Classical Macroeconomics
Author: Sergi Francesco
In 1981, Robert Lucas and Thomas Sargent edited Rational Expectations and Econometric Practice. The contributions to this volume “dealt with various aspects of the general problem of drawing inferences about behavior from observed economic time series” (Lucas and Sargent, 1981, p. xi). The collected papers aim to “offer something to the economist who wishes to apply the idea of rational expectations to problems of estimation, testing, policy evaluation or control” (ibid., p. xxxviii). The Lucas-Sargent’s volume represents a synthesis of the collective effort to construct an empirical strategy for the New Classical approach to macroeconomics. As Hansen and Sargent (1980, pp. 7-8) summarized it “(…) this strategy involves estimating agent’s decision rules jointly with models for stochastic processes they face, subject to cross-equation restrictions implied by the hypothesis of rational expectations”. The claim of the paper is twofold: (1) to enlighten the consistence of new empirical methods with New Classical methodology for macroeconomics; (2) to suggest a critical account of the problems that flawed this empirical approach. This paper is a contribution to recent history of macroeconomic thought. (1) Lucas, the methodological “spokesperson” of New Classical macroeconomics, emphasized the “abstract, patently unreal” (Lucas, 1980, p. 696) character of his way of modelling; however, he expressed major concern on empirical issues. The empirical testing of models appears in its early work (Lucas, 1972 and 1973), as well as the foundations of estimation methods and policy evaluation (Lucas, 1976). If Lucas’s methodological view is influent, it says little concrete about the application of econometric methods to New Classical macroeconomics. Thomas Sargent, Lars Hansen, Thomas Cooley and Edward Prescott (among others) played a crucial, pragmatic role in “putting Lucas’s methodology to work”. My contribution sheds light on these works that have received few attentions by historians of macroeconomic thought (except in Hoover, 1988 and Kim, 1988). (2) From the perspective of the history of applied econometrics, econometric methods for New Classical macroeconomics represent a transition. They are innovative because of their emphasis on the “Lucas Critique” and because they break with Cowles Commission’s legacy in macroeconomics. However, they also face many problems, both methodological (a specific theoretical-driven approach, identification) and technical (the intractable nature of complex models). These difficulties explain the rejection of this strategy by other macroeconomists, as well as the further development of alternative empirical methods (VAR models, calibration, Bayesian econometrics). The aim of the article is to show how New Classical Macroeconomics tackled the challenge of producing new empirical methods and which problems flawed this econometric strategy. References Hansen, Lars P. and Sargent, Thomas J. (1980). Formulating and Estimating Dynamic Linear Rational Expectations Models. Journal of Economic Dynamics and Control, vol. 2:7-46. Reprinted in Lucas, Robert E. and Sargent, Thomas J. (eds.) (1981). Rational Expectations and Econometric Practice. George Allen and Unwin Ltd., London, pp. 91-125. Hoover, Kevin D. (1988). The New Classical Macroeconomics: A Sceptical Inquiry, Basil Blackwell, Oxford. Kim, Kyun (1988). Equilibrium Business Cycle Theory in Historical Perspective. Cambridge University Press, Cambridge, MA. Lucas, Robert E. (1972). Econometric Testing of the Natural Rate Hypothesis. Reprinted in Lucas, Robert E. and Sargent, Thomas J. (eds.) 1981 Rational Expectations and Econometric Practice. George Allen and Unwin Ltd., London, pp. 90-103. Lucas, Robert E. (1973). Some International Evidence on Output-Inflation Tradeoffs. The American Economic Review, 63(3):326-334. Lucas, Robert E. (1976). Econometric Policy Evaluation: A Critique. Carnegie-Rochester conference series on public policy, vol. 1:19-46. Lucas, Robert E. (1980). Methods and Problems in Business Cycle Theory. Journal of Money, Credit and Banking, 12(4):696-715. Lucas, Robert E. and Sargent, Thomas J. (eds.) (1981). Rational Expectations and Econometric Practice. George Allen and Unwin Ltd., London.
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