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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.

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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.

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