What was the Lucas Critique and its impact?
The Lucas Critique, presented in my 1976 paper 'Econometric Policy Evaluation: A Critique,' argued that traditional econometric models used for policy evaluation were flawed. These models were often estimated using historical data, and their parameters would likely change when the underlying policy regime changed. This meant that using such models to predict the effects of a new policy was unreliable, as agents' expectations and behavior would adapt to the new regime. The critique highlighted the need for models grounded in stable, optimizing behavior.
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