DSGE Models and the Lucas Critique. A Historical Appraisal

Francesco Sergi ()
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Francesco Sergi: University of the West of England, Bristol

Working Papers from Department of Accounting, Economics and Finance, Bristol Business School, University of the West of England, Bristol

Abstract: This contribution to the history of the economic thought aims at describing how “Econometric Policy Evaluation: A Critique” (Lucas, 1976) has been interpreted through four decades of debates. This historical appraisal clarifies how Lucas’s argument is currently understood and discussed within the dynamic stochastic general equilibrium (DSGE) approach. The article illustrates how two opposite interpretations of the Lucas Critique arose in the early 1980s. On the one hand, a “theoretical interpretation” has been championed by the real business cycle (RBC) approach; on the other hand, an “empirical interpretation” has been advocated by Keynesians. Both interpretations can be understood as addressing a common question: Do microfoundations imply parameters’ stability? Following the RBC theoretical interpretation, microfoundations do imply stability; conversely, for Keynesians, parameters’ stability (or instability) should be supported by econometric evidence rather than theoretical considerations. Furthermore, the article argues that the DSGE approach represent a fragile compromise between these two opposite interpretations of Lucas (1976). This is especially true for the recent literature criticizing the DSGE models for being vulnerable to the Lucas Critique.

Date: 2018-01-06
New Economics Papers: this item is included in nep-dge, nep-ecm, nep-his and nep-hpe
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Citations: View citations in EconPapers (7)

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