Lucas critique

Definition

The observation that economic equations estimated under one policy regime are unlikely to be valid under another policy regime, since market participants will take the policy regime into account in forming their behavior. What is needed is to model rational expectations, which internalize all information, including the policy regime. Due to Lucas (1976).

Use Lucas critique in a sentence

The lucas critique effected us in some way, but I did not know exactly what it was and I wanted to know.

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You may want to try and use the lucas critique to see if there is any way that your company could perform better

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I spent the better part of a day reading up on the Lucas critique and found it to be an engaging read that opened my eyes to some new ideas.

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