Lucas critique
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According to Lucas Critique, prediction based on historical data would be invalid if some policy change alters the relationship between relevant variables (such as private agents' rational expectations of inflation). If the policy change alters the relationship between the variables, then the historical relationship between the variables would differ in the future relationship.
This notion was first set forth by Robert Lucas.
As David Levine notes (http://levine.sscnet.ucla.edu/general/kp.htm),"the Lucas critique only tells us how not to do economic analysis. The idea of time consistency, developed by Finn E. Kydland and Edward C. Prescott in 'Rules rather than Discretion...' focuses instead on the strategic idea that policies that yield short-term benefits that are negated in the future by changes in expectations. This idea leads to the positive research program of focusing on such issues as the credibility of commitments and institutional arrangements such a independent central banks that make make commitments credible."
The Lucas critique by itself casts doubt on the ability of activist stabilization policy to be beneficial because Lucas indicates that the effect of policy on aggregate demand depends on the public's expectations. Because the outcome of policy is less predictable in Lucas's view than if expectations do not matter, it is harder to design a beneficial activist stabilization policy.Template:Econ-stub