Working Paper 01-5
by Daniel G. Swaine
Lucas (1976) criticized Keynesian models because of
parametric instability. For many economists, the Lucas
critique provided a reason to replace the Keynesian
approach with equilibrium models of the business cycle.
One example of the equilibrium approach is the Real
Business Cycle (RBC) model. However, RBC models have
not been subjected to the same scrutiny of tests of
parameter instability. We present a prototypical RBC
model and subject it to structural change tests. Our
results document evidence of extensive parameter instability.
Thus, the Lucas critique is applicable and
we conclude that the single representative agent class
of RBC models has an invalid structural form.
This paper was revised in March 2002.
JEL classification codes: C32, E1, E13, E32
Keywords: business cycles, real business cycle models,
neoclassical growth model, stochastic growth models
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