How the Lucas Critique Impacts the Rotemberg Economic Model
Author:
(1) David Staines.
Table of Links
4 Calvo Framework and 4.1 Household’s Problem
4.3 Household Equilibrium Conditions
4.5 Nominal Equilibrium Conditions
4.6 Real Equilibrium Conditions and 4.7 Shocks
5.2 Persistence and Policy Puzzles
6 Stochastic Equilibrium and 6.1 Ergodic Theory and Random Dynamical Systems
7 General Linearized Phillips Curve
8 Existence Results and 8.1 Main Results
9.2 Algebraic Aspects (I) Singularities and Covers
9.3 Algebraic Aspects (II) Homology
9.4 Algebraic Aspects (III) Schemes
9.5 Wider Economic Interpretations
10 Econometric and Theoretical Implications and 10.1 Identification and Trade-offs
10.4 Microeconomic Interpretation
Appendices
A Proof of Theorem 2 and A.1 Proof of Part (i)
B Proofs from Section 4 and B.1 Individual Product Demand (4.2)
B.2 Flexible Price Equilibrium and ZINSS (4.4)
B.4 Cost Minimization (4.6) and (10.4)
C Proofs from Section 5, and C.1 Puzzles, Policy and Persistence
D Stochastic Equilibrium and D.1 Non-Stochastic Equilibrium
D.2 Profits and Long-Run Growth
E Slopes and Eigenvalues and E.1 Slope Coefficients
E.4 Rouche’s Theorem Conditions
F Abstract Algebra and F.1 Homology Groups
F.4 Marginal Costs and Inflation
G Further Keynesian Models and G.1 Taylor Pricing
G.3 Unconventional Policy Settings
H Empirical Robustness and H.1 Parameter Selection
I Additional Evidence and I.1 Other Structural Parameters
I.3 Trend Inflation Volatility
I.2 Lucas Critique
Proposition 11 and the parametizations in Appendix H.1.2 suggest that the observational equivalence part of the Lucas critique applies to the Rotemberg model (at ZINSS) only if the microeconomic evidence supports ˜ω > 1. At the headline parametization
Lastly, the parametization could be effected by the addition of real frictions. These suppress the relationship between real output and marginal costs (see Gopinath and Itskhoki [2011]), which would show up as
where R > 0 measures the size of the real friction. These have been popular because the slope of the Rotemberg Phillips curve appears too high, from a macroeconometric standpoint. The difficulty is that microeconometric evidence favours smaller values, which are too small to overturn these conclusions (see Beck and Lein [2020]). This is probably as far as one should take this exercise.
This paper is available on arxiv under CC 4.0 license.
