On Policy Regimes

Abstract

Lucas’s (1976) “Econometric Policy Evaluation: A Critique” is widely regarded as the most influential paper in macroeconomics of the 1970s. It is usually read as making the simple point that the Keynesian econometric models of the 1960s were not well founded on microeconomic principles and in particular that Keynesian model builders played fast and loose with agents’ expectations (for example, Mankiw, 1990). On this conservative reading, Lucas was surely correct. Lucas, however, had more in mind than merely criticizing particular Keynesian macroeconomic models. He also argued that the entire mode of analyzing policy interventions employed in Keynesian policy analysis was in conflict with general equilibrium theory. Here Lucas was distinguishing the methodological question of how one analyzes policy using any macroeconomic model from the substantive question of whether Keynesian models are correct. That he considered the former problem the basic one is indicated by the fact that he contrasted the Theory of Economic Policy mode of policy analysis with his recommended mode within the context of an abstract functional representation of a generic macroeconomic model. Particular Keynesian and new classical models were considered only to develop the general argument.