Preview 658

The Lucas Critique of Policy Evaluation 659

Econometric Policy Evaluation 659

Example: The Term Structure of Interest Rates 659

New Classical Macroeconomic Model 660

Effects of Unanticipated and Anticipated Policy 661

Box 1 Proof of the Policy Ineffectiveness Proposition 663

Can an Expansionary Policy Lead to a Decline in Aggregate Output? 663

Implications for Policymakers 664

New Keynesian Model 665

Effects of Unanticipated and Anticipated Policy 666

Implications for Policymakers 666

Comparison of the Two New Models with the Traditional Model 666

Short-Run Output and Price Responses 668

Stabilization Policy 670

Anti-inflation Policies 671

Credibility in Fighting Inflation 673

Box 2 Global: Ending the Bolivian Hyperinflation: Case Study of a

Successful Anti-inflation Program 674

Application Credibility and the Reagan Budget Deficits 675

Impact of the Rational Expectations Revolution 676

Summary, Key Terms, Questions and Problems, and Web Exercises 677

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