PRACTITIONERS' CORNER: The Lucas Critique in Light of Swiss Monetary Policy
| Author | Andreas M. Fischer,Michel Peytrignet |
| Date | 01 November 1991 |
| DOI | http://doi.org/10.1111/j.1468-0084.1991.mp53004008.x |
| Published date | 01 November 1991 |
OXFORD BULLETIN OF ECONOMICS AND STATISTICS, 53, 4(199 1)
03059049 $3.00
PRACTITIONERS' CORNER
The Lucas Critique in Light of Swiss Monetary Policy
Andreas M Fischer and Michel Peytrignet*
Lucas (1976) argues that in the event of policy regime changes, regression
models are by construction mis-specified and therefore behave poorly.
Unstable econometric regressions, however, do not exclude the possibility of
an underlying constant behavioral function. The absence of a constant-
parameter model may stem from a mis-specified model rather than shifts in
the underlying behavioral function. When marginal processes are subject to
shifts in policy, valid conditioning is crucial for parameter constancy.
Through tests of exogeneity, proposed recently by Engle and Hendry (1990),
we examine the legitimacy of conditioning claims for Swiss money demand
functions during the 1973-89 period.
Monetary policy in Switzerland has undergone several regime changes in
the last two decades. Testing invariance properties with respect to Swiss
regime shifts is of considerable interest, because it highlights the monetarist
debate over the appropriate exogeneity assumptions for money demand
models. The Swiss National Bank's (SNB) policy change from exchange rate
to monetary targeting has important implications for the exogeneity status of
money in money demand functions. Under a policy of monetary targeting,
single-equation money demand models should be formulated with prices as
the dependent variable allowing conditioning on 'exogenous' money. Never-
theless, we find the conventional view to be true. Money is endogenous in our
specified demand function and is structurally stable in response to policy
shifts.In this paper we first present an informal account of regime shifts in Swiss
monetary policy. We then discuss how the money demand function is
expected to shift in the face of such policy changes. Next, empirical analysis
establishes the super exogeneity of prices and interest rates in a money
demand function. The implications from the exogeneity results are that the
*We would like to thank Hermann Garbers, David Hendry, Marco Mira d'Ercole and
seminar participants at the University of Zurich for comments and suggestions. All estimates in
the paper were performed using PCGIVE and PCFIML.
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