The Lucas Critique, Policy Invariance and Multiple Equilibria

Roger Farmer

The Review of Economic Studies, 1991, vol. 58, issue 2, 321-332

Abstract: The Lucas Critique of Econometric Policy Evaluation argues that the parameters of econometric models are subject to theoretical cross-equation restrictions which follow from the fact that the endogenous variables of the models are chosen optimally by forward-looking agents. In this paper I argue that these facts alone are insufficient to generate such restrictions. I present an example of a model in which there exist multiple stationary rational expectations equilibria one of which is supported by a process-invariant forecast rule. Immunity to the Lucas Critique is proposed as a selection criterion in models with multiple equilibria.

Date: 1991
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Working Paper: The Lucas Critique Policy Invariance and Multiple Equilibria (1989)
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