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Practical Policy Evaluation

Narayana R. Kocherlakota

NBER Working Paper No. 24643
Issued in May 2018
NBER Program(s):Economic Fluctuations and Growth Program, The Monetary Economics Program

In the wake of the Lucas Critique, the study of appropriate macroeconomic policy has largely focused on the comparison of different regimes/rules. In practice, few policymakers are faced with making those kinds of choices. In this paper, I examine the problem of a policymaker making but one in a long sequence of similar decisions (like to raise or cut interest rates by a quarter percentage point). I model the policymaker as playing a dynamic game against a forward-looking private sector. My main result is that, under relatively weak conditions, the policymaker's optimal within-equilibrium response to the current state can be found by applying statistical regression methods to past macroeconomic data. Theory is only useful as a source of information about credible functional form restrictions on these regressions. Based on this result, I argue that macroeconomic policy evaluation intended to be of practical value should rely considerably less on putatively structural macroeconomic models and considerably more on regression-based approaches.

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Document Object Identifier (DOI): 10.3386/w24643

Published: Narayana R. Kocherlakota, 2019. "Practical Policy Evaluation," Journal of Monetary Economics, . citation courtesy of

 
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