The Lucas Critique and the Volcker Deflation
13 Pages Posted: 16 Jul 2004 Last revised: 18 Aug 2010
Date Written: April 1984
This paper examines, in light of the Lucas Critique, the behavior of the Phillips curve and of the term structure of interest rates after October 1979. It starts with an informal account of the policy change and then discusses how we might expect these two relations to shift after such a change. It finds little evidence of a direct effect of the policy change on the Phillips curve, at least until 1982. It finds substantial evidence of a direct effect on term structure.
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