Criticizing the Lucas Critique: Macroeconometricians' Response to Robert Lucas

CES Working Papers, 2015.59

46 Pages Posted: 13 Sep 2016 Last revised: 24 Feb 2018

See all articles by Aurélien Goutsmedt

Aurélien Goutsmedt

Université Paris I Panthéon-Sorbonne - Centre d'Economie de la Sorbonne (CES)

Erich Pinzón-Fuchs

Universidad Nacional de Colombia

Matthieu Renault

Universidade de São Paulo - Department of Economics (FEA-USP)

Francesco Sergi

University of the West of England (UWE) - Bristol Business School

Date Written: 2015

Abstract

The standard history of macroeconomics considers Lucas (1976) – “the Lucas Critique” – as a pathbreaking 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 modeling (Woodford, 2003), and yet its interpretation and application still represent 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. Modeling practices of economic policy evaluation were not overthrown immediately after Lucas (1976), creating a divide between theoretical and applied macroeconomics (Brayton et al., 1997). In this paper we propose a careful account of Lucas’s argument and of some of the previous works anticipating the substantial outline of the Critique (like Frisch’s notion of autonomy). Then, we discuss our own interpretation of Lucas (1976), where we find two different perspectives: (1) a prescriptive perspective which tells how to build a good macroeconometric model (which is the standard and popular interpretation of the article); and (2) a positive perspective that regards the Lucas critique as an attempt to explain a specific real-world phenomenon: stagflation. Third, we classify the reactions of the Keynesian macroeconometricians following this line of interpretation. On the prescriptive side, the Keynesians protested against the New Classical solution to Lucas's critique (the use of the rational expectation hypothesis in particular). Klein, for instance, proposed an alternative microfoundational program to empirically study the formation of expectations. On the positive side, the Keynesians put into question the relevance of the Lucas Critique to explain the rise of both unemployment and inflation in the 1970s, trying to test the impact of policy regime changes and of shifts in agents' behavior. We argue that the explanation of the stagflation is to be found elsewhere. 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 modeling and expertise practices through the analysis of the debates – which have not yet been completely solved.

Keywords: History of macroeconomics, Keynesian economics, Lucas Critique, Macroeconometrics, Rational Expectations.

JEL Classification: B22, B41, E60.

Suggested Citation

Goutsmedt, Aurélien and Pinzón-Fuchs, Erich and Renault, Matthieu and Sergi, Francesco, Criticizing the Lucas Critique: Macroeconometricians' Response to Robert Lucas (2015). CES Working Papers, 2015.59. Available at SSRN: https://ssrn.com/abstract=2837766 or http://dx.doi.org/10.2139/ssrn.2837766

Aurélien Goutsmedt

Université Paris I Panthéon-Sorbonne - Centre d'Economie de la Sorbonne (CES) ( email )

106-112 Boulevard de l'hopital
106-112 Boulevard de l'Hôpital
Paris Cedex 13, 75647
France

HOME PAGE: http://https://www.epistemoecoparis1.com/aurelien-goutsmedt

Erich Pinzón-Fuchs (Contact Author)

Universidad Nacional de Colombia ( email )

Carrera 30 45-03
Bogota, None
Colombia

HOME PAGE: http://https://erichpinzonfuchs.wordpress.com/

Matthieu Renault

Universidade de São Paulo - Department of Economics (FEA-USP) ( email )

Av. Prof. Luciano Gualberto 908
São Paulo, São Paulo 05508-900
Brazil

Francesco Sergi

University of the West of England (UWE) - Bristol Business School ( email )

Frenchay Campus
Bristol, BS16 1QY
United Kingdom

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