For example, an increase in 1/121 would increase the actual value of 10 1 1.

Of course, Lucas is right in principle. Provided one compares only stochastic steady states, the effects mentioned by him will indeed obtain. But in practice the Lucas critique may be less relevant, especially in the short run. As we have argued above, very little is known about the learning processes that may prompt agents to converge to a rational expectations equilibrium. To the extent that it may take agents some time to adapt to the new policy rule, it may well be that both (3.22) and (3.16) give the wrong answers. This may explain why full-scale models embodying the REH are still relatively scarce.

70

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