The Lucas Critique in Light of Swiss Monetary Policy

Andreas Fischer () and Michel Peytrignet

Oxford Bulletin of Economics and Statistics, 1991, vol. 53, issue 4, 481-93

Abstract: Lucas (1976) argues that in the event of policy regime changes, regression models are by construction misspecified and therefore behave poorly. Unstable exonometric regressions, however, do not exclude the possibility of an underlying constant behavioral function. When marginal processes are subject to regime shifts, valid conditioning is crucial for parameter constancy. Through tests of exogeneity, proposed recently by Engle and Hendry (1990), the authors examine the legitimacy of conditioning claims for Swiss money demand functions during the 1973-89 period. The implications from their exogeneity results are that the Lucas critique is refuted and the specified money demand function is invariant to changes in monetary policy. Copyright 1991 by Blackwell Publishing Ltd

Date: 1991
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