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Abstract:
An increasingly popular approach to policy evaluation involves applying the parameters calibrated for a real business cycle model that does not include policy to a different model, where policy does affect private decisions. This technique, in effect, estimates a model that misspecifies how private behavior depends on policy. The calibrated parameters depend on policy behavior, but calibrators overlook this dependence when projecting policy effects. This procedure repeats the "Keynesian" errors that Lucas (1976) noted in his influential critique of (then) standard methods of econometric policy evaluation and produces predictions of policy consequences that may be no more useful than ones from traditional econometric models.
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