Scandinavian Working Papers in Economics
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The Economic Research Institute, Stockholm School of Economics SSE/EFI Working Paper Series in Economics and Finance

No 311:
Testing for the Lucas Critique: A Quantitative Investigation

Jesper Lindé ()

Abstract: In this paper, I try to shed some new light on the "puzzle" why the Lucas critique, believed to be important by most economists, seems to have received very little empirical support. I use a real business cycle model to verify that the Lucas critique is quantitatively important in theory, and to examine the properties of the super exogeneity test, which is used to detect the applicability of the Lucas critique in practice. The results suggest that the super exogeneity test is not capable of detecting the relevance of Lucas critique in practice in small samples.

Keywords: Lucas critique; real business cycle model; super exogeneity test; Taylor rules; money demand; consumption function; (follow links to similar papers)

JEL-Codes: C22; C52; E41; (follow links to similar papers)

33 pages, March 5, 1999, Revised May 25, 2000

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