Marcellino, Massimiliano and Salmon, Mark H. (Mark Howard), 1949- (2001) Robust decision theory and the Lucas critique. Working Paper. Warwick Business School, Financial Econometrics Research Centre, Coventry.

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Abstract

In this paper we re-consider the theoretical basis for the Lucas Critique from the point of view of Robust Decision Theory. We first emphasise that the Lucas Critique rests on a weak theoretical paradigm in that it fails to consider the motivation for the policy change by the government and hence inconsistently assumes limited rationality by the government. When placed in a proper dynamic general equilibrium framework of a dynamic game between the government and the private sector much of the force of the critique simply vanishes. We also re-consider the Critique by adopting an alternative theoretical paradigm and notion of rationality based on robust decision theory. This view of rationality might be regarded as more relevant than the non-robust rationality employed by Lucas and critically it is one in which the Lucas Critique can be shown to simply not apply provided the private sector has adopted suitably robust decision rules.

Item Type:	Working or Discussion Paper (Working Paper)
Subjects:	H Social Sciences > HB Economic Theory
Divisions:	Faculty of Social Sciences > Warwick Business School > Financial Econometrics Research Centre Faculty of Social Sciences > Warwick Business School
Library of Congress Subject Headings (LCSH):	Lucas, Robert E., Macroeconomics, Decision making, Economic policy, Equilibrium (Economics)
Series Name:	Working papers (Warwick Business School. Financial Econometrics Research Centre)
Publisher:	Warwick Business School, Financial Econometrics Research Centre
Place of Publication:	Coventry
Date:	18 September 2001
Number:	No.01-
Number of Pages:	31
Status:	Not Peer Reviewed
Access rights to Published version:	Open Access
Description:	First version, 1996; this version, September 18, 2001.
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URI:	http://wrap.warwick.ac.uk/id/eprint/1818

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