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Policy implications of the Lucas Critique empirically tested along the global financial crisis

Amira Karimova, Esra Simsek and Mehmet Orhan

Journal of Policy Modeling, 2020, vol. 42, issue 1, 153-172

Abstract: This study is the first attempt to facilitate the substantial change in post-crisis monetary policy of the Fed to test the validity of Lucas Critique toward exploring implications of such changes for policymaking. Global financial crisis, asking for fundamental regime alterations presented an invaluable opportunity to test the empirical validity of Lucas Critique. We make use of quarterly US data over 1990–2015 to test for superexogeneity, the rejection of which lends support to Lucas Critique. We define the marginal models for wealth, GDP and Treasury Bill rate to construct the conditional model of money demand following Hendry (1988). Our results reject superexogeneity of the policies and report the support for Lucas Critique. We discuss about the details and consequences of the monetary policy followed to suggest arguments to prolonging debates on policy discussions.

Keywords: Lucas Critique; Monetary policy; Superexogeneity; Invariance; Rational expectations (search for similar items in EconPapers)
JEL-codes: C22 C52 E41 E42 E52 E58 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.jpolmod.2019.06.003

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Handle: RePEc:eee:jpolmo:v:42:y:2020:i:1:p:153-172