"Adaptive Expectations, Underparameterization and the Lucas Critique

George Evans and Garey Ramey

University of Oregon Economics Department Working Papers from University of Oregon Economics Department

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 consider this issue from the vantage point of a bounded rationality, where for transparency we model bounded rationality by means of simple adaptive expectations.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; expectations; underparameterization; bounded rationality; learning (search for similar items in EconPapers)
JEL-codes: D83 D84 E31 E52 (search for similar items in EconPapers)
Pages: 18
Date: 2001-11-29, Revised 2004-12-01
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Related works:
Journal Article: Adaptive expectations, underparameterization and the Lucas critique (2006)
Working Paper: Adaptive Expectations, Underparameterization and the Lucas Critique (2001)
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Persistent link: https://EconPapers.repec.org/RePEc:ore:uoecwp:2001-8

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