Policy implications of the Lucas Critique empirically tested along the global financial crisis

Abstract

This study is the first attempt to facilitate the substantial change in post-crisis monetary policy of the Fed to test the validity of Lucas Critique toward exploring implications of such changes for policymaking. Global financial crisis, asking for fundamental regime alterations presented an invaluable opportunity to test the empirical validity of Lucas Critique. We make use of quarterly US data over 1990-2015 to test for superexogeneity, the rejection of which lends support to Lucas Critique. We define the marginal models for wealth, GDP and Treasury Bill rate to construct the conditional model of money demand following Hendry. Our results reject superexogeneity of the policies and report the support for Lucas Critique. We discuss about the details and consequences of the monetary policy followed to suggest arguments to prolonging debates on policy discussions. (C) 2019 The Society for Policy Modeling. Published by Elsevier Inc. All rights reserved.