Why use empirical macroeconomic models when they are not policy invariant (Lucas Critique)?

Economics Dec 15, 2020

Expert Solution

Lucas argued that the empirical macroeconomic model does not change with the changes in the policies. The emergence of the RBC and DSGE model has solved this argument as these models are based on micro-foundations and it can determine how the behavior of the economy changes with the change in polices. It considers the reaction of individuals on various policies.

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