Question

“The Lucas critique by itself casts doubt on the ability of discretionary stabilization policy to be beneficial.” Is this statement true, false, or uncertain? Explain your answer

Short answer

The statement is true. This is because the non-rational expectations regarding the economic models impacted the stabilization policy.

Step-by-step solution

Step:1  Introduction

In a 1976 article, prominent economist Robert Lucas described how macroeconomic models might be exploited to evaluate changes in economic policy. Lucas' critique is the name given to this piece.

Step:2 Explanation

The Lucas critique in Economics indicates to us the effect that will be carried upon the policy of price inflation and also that the outputs will be depending on the expectations that will help us make the economic policy more effective.

Non-rational expectations econometric models disregard the impact of changing expectations, making them unreliable for evaluating policy options. According to the Lucas critique, the impact of policy on inflation and output is influenced by expectations, making it more difficult to design a helpful policy.