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The DSGE Models and the Lucas Critique. A Historical Appraisal

Sergi Francesco, University of Bristol

This contribution to the history of the economic thought aims at describing how "Econometric Policy Evaluation: A Critique" (Lucas, 1976) has been interpreted through four decades of debates. This historical appraisal clarifies how Lucas's argument about the policy-invariance of macroeconometric models' parameters is understood and discussed in contemporary dynamic stochastic general equilibrium (DSGE) approach. The article shows how two opposite interpretations of the Lucas Critique arose in the early 1980s. On the one hand, a "theoretical interpretation" has been championed by the real business cycle (RBC) approach; on the other hand, an "empirical interpretation" has been advocated especially by the Keynesians (old and new) and time series econometricians. Both interpretations can be understood as different answers to a common question: do microfoundations of macroeconometric models imply that their parameters' values would not change along with changes in policy regimes? Following the RBC theoretical interpretation, the answer is "yes": microfoundations do always imply such a stability of parameters' values. Conversely, for Keynesians, parameters' stability should be supported by econometric evidence rather than theoretical considerations (a point already emphasized by Goutsmedt et al., 2017, Reacting to the Lucas Critique: The Keynesians' Pragmatic Replies, CES Working Paper 2017.42). The second part of the paper illustrates how the empirical and theoretical interpretation of the Critique currently coexist within the DSGE approach. This results into a fundamental disagreement about the actual vulnerability of DSGE models to the Lucas Critique and the potential solutions to this problem. Part of the DSGE modellers, following the theoretical interpretation, is arguing that "more microfoundations" would solve the problem; other DSGE modellers are rather arguing for a change in methods for empirical assessment.

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Keywords: Lucas Critique, DSGE models, History of macroeconomics

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