Abstract
A striking implication of the replacement of adaptive expectations by rational expectations was the "Lucas critique," which showed that expectation parameters, and endogenous variable dynamics, depend on policy parameters. We consider this issue from the vantage point of bounded rationality, where for transparency we model bounded rationality by means of simple adaptive expectations. We show that for a range of processes, monetary policy remains subject to the Lucas critique. However, there are also regimes in which the expectation parameter is locally invariant and the Lucas critique does not apply. (c) 2005 Elsevier B.V. All rights reserved.
Original language | English |
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Pages (from-to) | 249-264 |
Number of pages | 16 |
Journal | Journal of Monetary Economics |
Volume | 53 |
Issue number | 2 |
DOIs | |
Publication status | Published - Mar 2006 |
Keywords
- Lucas critique
- expectations
- underparameterization
- bounded rationality
- learning
- MONEY SUPPLY RULE
- RATIONAL-EXPECTATIONS