Practical Policy Evaluation

Narayana Kocherlakota

No 24643, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In the wake of the Lucas Critique, the study of appropriate macroeconomic policy has largely focused on the comparison of different regimes/rules. In practice, few policymakers are faced with making those kinds of choices. In this paper, I examine the problem of a policymaker making but one in a long sequence of similar decisions (like to raise or cut interest rates by a quarter percentage point). I model the policymaker as playing a dynamic game against a forward-looking private sector. My main result is that, under relatively weak conditions, the policymaker's optimal within-equilibrium response to the current state can be found by applying statistical regression methods to past macroeconomic data. Theory is only useful as a source of information about credible functional form restrictions on these regressions. Based on this result, I argue that macroeconomic policy evaluation intended to be of practical value should rely considerably less on putatively structural macroeconomic models and considerably more on regression-based approaches.

JEL-codes: E58 E60 E61 (search for similar items in EconPapers)
Date: 2018-05
New Economics Papers: this item is included in nep-mac
Note: EFG ME
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Citations: View citations in EconPapers (3)

Published as Narayana R. Kocherlakota, 2019. "Practical Policy Evaluation," Journal of Monetary Economics, .

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