Adaptive Expectations, Underparameterization and the Lucas Critique

George Evans and Garey Ramey

University of California at San Diego, Economics Working Paper Series from Department of Economics, UC San Diego

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 reconsider this issue from the vantage point of bounded rationality. Adaptive expectations, with an optimally tuned parameter, can provide a reasonable, if not fully rational, forecast method when the true process is unknown. 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; rational expectations (search for similar items in EconPapers)
Date: 2001-05-01
References: Add references at CitEc
Citations: View citations in EconPapers (12)

Downloads: (external link)
https://www.escholarship.org/uc/item/41f2h196.pdf;origin=repeccitec (application/pdf)

Related works:
Journal Article: Adaptive expectations, underparameterization and the Lucas critique (2006)
Working Paper: "Adaptive Expectations, Underparameterization and the Lucas Critique (2004)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cdl:ucsdec:qt41f2h196

Access Statistics for this paper

More papers in University of California at San Diego, Economics Working Paper Series from Department of Economics, UC San Diego Contact information at EDIRC.
Bibliographic data for series maintained by Lisa Schiff ().