Minimize Regulations to Regulate – Extending the Lucas Critique

Sugata Marjit, Amit K. Biswas, Hamid Beladi
JEL codes: 
Draft Paper - January 2005

Lucas (1976) argued that interventionist policies in macroeconomics may fail because the policies themselves affect the optimal behavior of private agents and hence the associated response parameters. We extend Lucas’s argument and propose that a highly controlled and regulated environment leads to misinterpretation of official statistics and therefore distorts policy predictions based on such information. In a way policies will have predictability in a more open and less regulated environment.