Modern Monetary Policy Evaluation and the Lucas Critique

Dialogi Polityczne (Political Dialogues): Journal of Political Theory, Vol. 19, 2015

23 Pages Posted: 6 Dec 2018

Date Written: August 03, 2015

Abstract

We can divide modern mainstream approaches to monetary policy evaluation in roughly four groups: large-scale Keynesian macroeconometrics, Monetarism, New Classical macroeconomics, and the most recent consensus approach of New Keynesian DSGE modeling. In a brief historical overview it is shown that the overarching element in all four approaches is a distinctly positivistic framework of mathematical model building and testing in light of continuously gathered macro data. It is argued that this is precisely the reason why the modern consensus approach cannot be seen as an adequate solution to the fundamental problem indicated by the Lucas Critique. The latter must not be seen as a critique of any particular modeling approach within modern mainstream macroeconomics, but rather as one addressing its positivistic research program in general. A more radical critique of positivism is presented in order to clarify the core problem implicit in the Lucas Critique and to hint at a more promising route to circumvent it -- a route that has been mostly neglected by mainstream economics.

Keywords: Lucas critique, positivism, modern macroeconomics

JEL Classification: B22, B25, B41, C54

Suggested Citation

Israel, Karl-Friedrich, Modern Monetary Policy Evaluation and the Lucas Critique (August 03, 2015). Dialogi Polityczne (Political Dialogues): Journal of Political Theory, Vol. 19, 2015 , Available at SSRN: https://ssrn.com/abstract=3291259

Karl-Friedrich Israel (Contact Author)

Université catholique de l'Ouest ( email )

3 Place André Leroy
Angers, 49000
France

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