Why did Lucas criticize traditional methods of policy evaluation?

Lucas criticized traditional policy evaluation methods, such as relying on standard econometric models, for not fully considering the impact of policy changes on people's expectations.

①Meaning: Lucas emphasized how people form expectations for the future and believed that expectations play a vital role in the economy because expectations influence various economic behaviors.

Therefore, when policymakers estimate the effects of any policy change, they need to know how people respond to the policy change.

Lucas argues that traditional approaches to policy evaluation (such as those relying on standard macroeconomic measurement models) do not fully take into account the expected impacts of policies.

This criticism of traditional policy evaluation is the Lucas criticism.

②Lucas's criticism has taught us two lessons: In a narrow sense: Economists who evaluate different policies need to consider how policies affect expectations, and thus need strategies.

Broad implications: Policy evaluation is difficult, so economists doing this work should display the necessary humility.

Conventional wisdom: The cost of reducing inflation is usually measured by the sacrifice rate, which is often very large.

Rational expectations: They argue that these sacrifice rate estimates are limited by Lucas' criticism and are unreliable.

Traditional sacrifice rate estimates are based on adaptive expectations, where the assumption of expected inflation depends on past inflation.

In some cases, adaptive expectations may be a reasonable premise, but if policymakers make policy changes credible, workers and businesses that set wages and prices will respond rationally by adjusting their inflation expectations appropriately.

Such changes in inflation expectations would quickly alter the short-term trade-off between inflation and unemployment.

As a result, the cost of reducing inflation is likely to be much lower than traditional sacrifice rate estimates.

Mankiw, an economics professor at Harvard University, studied economics at Princeton University and MIT.

He teaches macroeconomics, microeconomics, statistics and economic principles.

Professor Mankiw is also a co-investigator with the National Bureau of Economic Research (NBER), an advisor to the Congressional Budget Office, the Federal Reserve Banks of Boston and New York, and a member of the Economics Prerequisite Course Exam Development Committee of the American Educational Testing Service.

From 2003 to 2005, he served as Chairman of the President's Economic Advisory Council.