Staff Report 376

Modern Macroeconomics in Practice: How Theory is Shaping Policy

Patrick J. Kehoe | Stanford University, University College London, Federal Reserve Bank of Minneapolis
V. V. Chari | University of Minnesota, Federal Reserve Bank of Minneapolis

Published August 1, 2006

Theoretical advances in macroeconomics made in the last three decades have had a major influence on macroeconomic policy analysis. Moreover, over the last several decades, the United States and other countries have undertaken a variety of policy changes that are precisely what macroeconomic theory of the last 30 years suggests. The three key developments that have shaped macroeconomic policy analysis are the Lucas critique of policy evaluation due to Robert Lucas, the time inconsistency critique of discretionary policy due to Finn Kydland and Edward Prescott, and the development of quantitative dynamic stochastic general equilibrium models following Finn Kydland and Edward Prescott.

Published In: Journal of Economic Perspectives (Vol. 20, No. 4, Fall 2006, pp. 3-28)

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