ABSTRACT OF PAPER
Title: Criticizing the Lucas Critique: Macroeconometricians’ Response to Robert Lucas
Author: Goutsmedt Aurélien, Matthieu Renault, Pinzon Fuchs Erich, Sergi Francesco
The standard history of macroeconomics considers Lucas (1976)–“the Lucas Critique”–as a path-breaking innovation for the discipline. According to this view Lucas’s article dismissed the traditional macroeconometric practice calling for new ways of conceiving the quantitative evaluation of economic policies. The Lucas Critique is considered, nowadays, as a fundamental principle of macroeconomic modelling (Woodford, 2003). The interpretation and the application of the Critique, however, represent still unsolved issues in economics (Chari et al. 2008). Even if the influence of Lucas’s contribution cannot be neglected, something seems to be missing in the narrative: the reactions of the economists that were directly targeted by the Critique. Modelling practices of economic policy evaluation were not overthrown immediately after Lucas (1976), creating a divide between theoretical and applied macroeconomics (Brayton et al. 1996). The purpose of this paper is to study the reactions of the macroeconometricians criticized by Lucas. We focus especially on those macroeconometricians who worked on policy evaluation and who held an expertise position in governmental institutions. We categorize the different reactions to the Critique, in order to enrich the understanding of the evolution of modelling and expertise practices through the analysis of the debates–which have not yet been completely solved. In the first section we propose a careful account of Lucas’s argument and of some of the previous work anticipating the substantial outline of the Critique (like Frisch’s notion of autonomy); second, we show the way in which macroeconometricians like Klein, Blinder or Malinvaud reacted to Lucas (1976). The claim of the paper is that there are, at least, two mainstands face to Lucas (1976). (A) The Lucas Critique is not relevant for policy evaluation. The substantial argument of Lucas is logically correct, but empirically refutable; therefore, the Critique should not affect the usefulness of traditional macroeconometric models for policy evaluation (Blinder, 1979). (B) The Lucas Critique is relevant for policy evaluation but: (1) Even if Lucas is right, no viable solution exists, and Lucas himself does not suggest any applied method that would definitely deal with the problem. Traditional macroeconometric models would stand as a valid option for policy evaluation, but should be manipulated carefully (Malinvaud, 1982, 1985). (2) The Critique calls for change in macroeconometric modelling, suggesting two different lines of research: the first would be to follow the New Classical solutions (Lucas and Sargent, 1981). The second would be to try alternative solutions (Klein, 1987). The aim of the paper is first to show how the macroeconometricians reacted to Lucas (1976) and then to construct a richer understanding of the evolution in macroeconomic expertise. References Blinder, Alan S. (1979). Economic Policy and the Great Stagflation. New York, Academic Press. Brayton, Flint, Levin, Andrew, Tryon, Ralph and Williams, John C. (1997). The Evolution of Macro Models at the Federal Reserve Board. Carnegie-Rochester Conference Series on Public Policy, vol. 47:43-81. Chari, V. V., Kehoe, Patrick J. and McGrattan, Ellen R. (2008). New Keynesian Models: Not Yet Useful for Policy Analysis. American Economic Journal, 1(1):242-66. Klein, Lawrence R. (1987). The ET Interview: Professor L.R. Klein. Econometric Theory, 3(3):409-460. Interview by Mariano, Roberto. Lucas, Robert E. (1976). Econometric Policy Evaluation: A Critique. Carnegie-Rochester conference series on public policy, vol. 1:19-46. Lucas, Robert E. and Sargent, Thomas J. (eds.) (1981). Rational Expectations and Econometric Practice. London, George Allen and Unwin Ltd. Malinvaud, Edmond (1982). “Où en est la théorie macroéconomique ?”, Revue européenne des Sciences Sociales, Tome XX, n° 62, p. 5-23. Malinvaud, Edmond (1985), “Le marché du travail en déséquilibre”, in Alain Barrère (1985), Keynes aujourd’hui : théories et politiques, Paris, Economica, p. 462-477. Woodford, Michael (2003). Interest and Prices. Foundations of a Theory of Monetary Policy, Princeton, Princeton University Press.
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