Reacting to the Lucas Critique: The Keynesians' Replies

Abstract

In 1976, Robert Lucas explicitly criticized Keynesian macroeconometric models for their inability to correctly predict the effects of alternative economic policies. Today, most contemporary macroeconomists and some historians of economics consider that the Lucas’s critique led forcefully to immediate disqualification of the Keynesian macroeconometric approach. This narrative is based on the interpretation of the Lucas Critique as a fundamental principle for economic reasoning that was (and still is) logically unquestionable. We consider that this narrative is problematic both in terms of historiography and of the effects that it can have in the field as a way of assigning importance and credit to particular macroeconomists. Indeed, the point of view of the Keynesian economists is missing despite the fact that they were the target of Lucas’s paper and that throughout the 1970s and 1980s they produced a fierce reaction against it. In this paper, we analyze the reactions by a broad set of authors (that we label as “Keynesians”) that disputed the relevance of the critique. In spite of their diversity in methodological, theoretical, and policy issues, these reactions were characterized by their common questioning of the empirical and practical relevance of the Lucas critique.

Inflation – Unemployment Dilemma. A Cross-Country Analysis

“…A few years later, Lucas (1976) also argued that Keynes' approach did not take into account the fact that the relationship between the two variables can change when individuals' behavior modifies, as a result of the changes in the economic policies. In other words, he stated that models designed for policy evaluation should also involve a detailed description of the changes in the behavior of economic agents as a reaction to changes in economic policy rules (Goutsmedt, Pinzón-Fuchs, Renault, & Sergi, 2019). Lucas' argument, also associated with the rational expectations hypothesis, was widespread among the macroeconomists' studies from the end of the last century.…”

Rediscovering the 1%: Knowledge Infrastructures and the Stylized Facts of Inequality

“…The questions raised by this intercalated temporality (Galison 1997) are different from philosophers' concerns with the theory-ladenness of individual perception preventing the identification of disconfirming evidence. Macroeconomists' infrastructure did not prevent macroeconomists from making some theory-disconfirming observations -for example, the simultaneous presence of high unemployment and high inflation identified by the infrastructure in the 1970s arguably undermined Keynesian theories in favor of newer alternatives (Goutsmedt et al 2019). Instead, the case here suggests that knowledge infrastructures shape agendas and priorities, making it much easier for certain research to go undone (Frickel et al 2010).…”

European Economics and the Early Years of the International Seminar on Macroeconomics

“…Numerous discussions on macroeconometric modelling took place in the early years of the ISoM. They expressed an unaltered confidence in large-scale macroeconometric models, despite the rising importance of Sims's and Lucas's criticisms (Salazar and Otero, 2019;Goutsmedt et al, 2019). During the first meeting, Sims presented a criticism of large-scale models (Sims, 1978, a forerunner of the famous Sims, 1980).…”