Since the publication (1976) of the classic Lucas critique, researchers in empirical macroeconomics have endeavored to specify models that capture the underlying dynamic decision-making behavior of consumers and firms who require forecasts of future events. Recently, a number of researchers have developed simple models that have become the workhorses for monetary policy analysis. The models vary considerably with regard to optimizing foundations and explicit treatment of expectations. However, relatively little effort has been devoted to testing the empirical importance of the Lucas critique for these simple models. Can one find specifications that are policy-invariant? This paper develops and implements a set of tests for several monetary policy models used extensively in the literature. In particular, we attempt to test the robustness of optimizing versus nonoptimizing models to changes in the monetary policy regime. We present evidence that shows that some forward-looking models from the recent literature may be less stable than their better-fitting backward-looking counterparts.

This paper examines the out-of-sample performance of various financial variables as predictors of U.S. recessions. Series such as interest rates and spreads, stock prices, and monetary aggregates are evaluated individually and in comparison with other financial and nonfinancial indicators. The analysis focuses on out-of-sample performance from one to eight quarters ahead. Results show that stock prices are useful with one- to three-quarter horizons, as are some well-known macroeconomic indicators. Beyond one quarter, however, the slope of the yield curve emerges as the clear individual choice and typically performs better by itself out of sample than in conjunction with other variables.