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    Tests of policy ineffectiveness in macroeconometrics

    Pesaran, M.H. and Smith, Ron P. (2014) Tests of policy ineffectiveness in macroeconometrics. Working Paper. Birkbeck College, University of London, London, UK.

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    Abstract

    This paper proposes tests of policy ineffectiveness in the context of macroeconometric rational expectations models. It is assumed that there is a policy intervention that takes the form of changes in the parameters of a policy rule, and that there are sufficient observations before and after the intervention. The test is based on the difference between the realisations of the outcome variable of interest and counterfactuals based on no policy intervention, using only the pre-intervention parameter estimates, and in consequence the Lucas Critique does not apply. The paper develops tests of policy ineffectiveness for a full structural model, with and without exogenous, policy or non-policy, variables. Asymptotic distributions of the proposed tests are derived both when the post intervention sample is fixed as the pre-intervention sample expands, and when both samples rise jointly but at different rates. The performance of the test is illustrated by a simulated policy analysis of a three equation New Keynesian Model, which shows that the test size is correct but the power may be low unless the model includes exogenous variables, or if the policy intervention changes the steady states, such as the inflation target.

    Metadata

    Item Type: Monograph (Working Paper)
    Additional Information: ISSN 1745-8587: BWPEF 1405
    Keyword(s) / Subject(s): Counterfactuals, policy analysis, policy ineffectiveness test, macroeconomics
    School: Birkbeck Schools and Departments > School of Business, Economics & Informatics > Economics, Mathematics and Statistics
    Depositing User: Administrator
    Date Deposited: 20 May 2016 13:23
    Last Modified: 31 Jul 2019 04:51
    URI: http://eprints.bbk.ac.uk/id/eprint/15284

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