Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

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

Jesper Lindé ()
Additional contact information
Jesper Lindé: Research Department, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden

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

JEL-codes: C22; C52; E41

33 pages, First version: March 5, 1999. Revised: May 25, 2000. Earlier revisions: March 9, 1999, November 1, 1999, April 11, 2000, May 3, 2000.

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