TY  - BOOK
AU  - Nelson,Charles R.
AU  - Kim,Chang-Jin
ED  - National Bureau of Economic Research.
TI  - The Time-Varying-Parameter Model as an Alternative to ARCH for Modeling Changing Conditional Variance: The Case of Lucas Hypothesis 
T2  - NBER technical working paper series
PY  - 1988///
CY  - Cambridge, Mass.
PB  - National Bureau of Economic Research
N1  - September 1988; Hardcopy version available to institutional subscribers
N2  - The main econometric issue in testing the Lucas hypothesis (1973) in a times series context is the estimation of the variance conditional on past information. The ARCH model, proposed by Engle (1982), is one way of specifying the conditional variance. But the assumption underlying the ARCH specification is ad-hoc. The existence of ARCH can sometimes be interpreted as evidence of misspecification. Under the assumption that a monetary policy regime is continuously changing, a time-varying-parameter (TVP) model is proposed for the monetary growth function. Based on Kalman filtering estimation of recursive forcast errors and their conditional variances, the Lucas hypothesis is tested for the U.S. economy (1964.1 - 1985.4) using monetary growth as an aggregate demand variable. The Lucas hypothesis is rejected in favor of Friedman's (1977) hypothesis: the conditional variance of monetary growth affects real output directly, not through the coefficients on the forcast error term in the Lucas-type output equation
UR  - https://www.nber.org/papers/t0070
UR  - http://dx.doi.org/10.3386/t0070
ER  -