Empirical Testing of the Lucas Critique for the U.S. Economy, 1986 – 2005

Dahiya, Dhruv (2008): Empirical Testing of the Lucas Critique for the U.S. Economy, 1986 – 2005.

Abstract

Lucas critique suggests parameter instability in usual policy multiplier based models, where the multipliers are estimated by running a regression of output on the relevant/hypothesized policy variables. I aim to test this implication for the U.S. economy using a simple aggregate demand and supply model, with rational expectations as the mechanism of expectation formation, given a money supply specification. The relevant data set (for inferential purposes) is quarterly, 1986:1 – 2005:4, with the exact model specification chosen from Heijdra and Ploeg.

• Item Type: MPRA Paper
• Language: English
• Subjects: E - Macroeconomics and Monetary Economics > E0 - General > E00 - General; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E60 - General

References

1. G.S. Maddala: Introduction to Econometrics (Third edition), Chapters 4, 5, 6, 9, 10, 13.

2. Jack Johnston and John Dinardo: Econometrics, Chapters 2, 3.

3. Damodar Gujarati: Essentials of Econometrics (Third edition), Chapter 10.

4. Ben J. Heijdra, Frederick van der Ploeg, The Foundations of Modern Macroeconomics, pp. 60-70.