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The Credibility Problem Revisited: Thirty Years on from Kydland and Prescott *
Author(s) -
Levine Paul,
Pearlman Joseph,
Yang Bo
Publication year - 2008
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/j.1467-9396.2008.00772.x
Subject(s) - credibility , economics , normative , rational expectations , order (exchange) , bayesian probability , welfare , macroeconomics , calibration , econometrics , mathematical economics , computer science , finance , political science , mathematics , market economy , artificial intelligence , statistics , law
Macroeconomics research has changed profoundly since the Kydland–Prescott seminal paper. In order to address the Lucas Critique, modeling is now based on micro‐foundations treating agents as rational utility optimizers. Bayesian estimation has produced models which are more data‐consistent than those based simply on calibration. With micro‐foundations and new linear‐quadratic techniques, normative policy based on welfare analysis is now possible. In the open economy, policy involves a “game” with policymakers and private institutions or private individuals as players. This paper attempts to reassess the Kydland–Prescott contribution in the light of these developments.