Adaptive Expectations, Underparameterization and the Lucas Critique

University of Oregon Department of Economics Working Paper No. 237

18 Pages Posted: 25 Mar 2002

See all articles by George W. Evans

George W. Evans

University of Oregon - Department of Economics; University of St. Andrews - School of Economics and Finance

Garey Ramey

University of California, San Diego (UCSD) - Department of Economics

Date Written: November 29, 2001

Abstract

A striking implication of the replacement of adaptive expectations by Rational Expectations was the "Lucas Critique," which showed that expectation parameters, and endogenous variable dynamics, depend on policy parameters. We consider this issue from the vantage point of bounded rationality, where for transparency we model bounded rationality by means of simple adaptive expectations. We show that for a range of processes, monetary policy remains subject to the Lucas critique. However, there are also regimes in which the expectation parameter is locally invariant and the Lucas critique does not apply.

Keywords: Lucas critique, expectations, underparameterization, bounded rationality, learning.

JEL Classification: E52, E31, D83, D84

Suggested Citation

Evans, George W. and Ramey, Garey, Adaptive Expectations, Underparameterization and the Lucas Critique (November 29, 2001). University of Oregon Department of Economics Working Paper No. 237, Available at SSRN: https://ssrn.com/abstract=304299 or http://dx.doi.org/10.2139/ssrn.304299

George W. Evans (Contact Author)

University of Oregon - Department of Economics ( email )

1285 University of Oregon
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United States
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University of St. Andrews - School of Economics and Finance ( email )

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St. Andrews, Fife KY16 8RD
United Kingdom
44-1334-462435 (Phone)

HOME PAGE: http://www.st-andrews.ac.uk/economics/staff/pages.g.evans.shtml

Garey Ramey

University of California, San Diego (UCSD) - Department of Economics ( email )

9500 Gilman Drive
La Jolla, CA 92093-0508
United States
858-534-5721 (Phone)
858-534-7040 (Fax)

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