The Lucas Critique

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Lucas’s “Econometric Policy Evaluation: A Critique” appeared in the 1976 Carnegie-Rochester Conference Series on Public Policy and is the most consequential methodological intervention in postwar macroeconomics. The argument: any econometric model estimated under a stable policy regime captures behavioural relationships that themselves depend on the regime. Agents’ decision rules — saving rates, labour-supply elasticities, the slope of the Phillips Curve — are functions of the policy environment in which agents formed their expectations. Use the model to evaluate a policy change, and the parameters you estimated will shift in response to the change you are evaluating; the evaluation is therefore methodologically incoherent.

The critique did not merely challenge the prevailing Old Keynesian econometric practice; it foreclosed it. Within a decade no top-tier graduate program was producing students who would estimate a Phillips Curve under one regime and use the estimate to evaluate a different regime. The methodological replacement — microfoundations plus rational expectations plus equilibrium analysis — became the structure of modern academic macroeconomics, including New Keynesian work that retained substantive Keynesian commitments. The Lucas critique is, in this sense, the founding moment of the New Classical program and the methodological substrate on which most subsequent macroeconomic work rests.