THE ENCOMPASSING IMPLICATIONS OF FEEDBACK VERSUS FEEDFORWARD MECHANISMS IN ECONOMETRICS
If expectations are an important ingredient of economic decisions, when expectations alter feedback, models should manifest parameter change. This aspect of the "Lucas critique" therefore has implications for feedforward models when expectations processes change but conditional models do not. Both invariance and encompassing attributes of each type of model are investigated to demonstrate that the Lucas critique is refutable, as well as confirmable, even with incomplete information about how agents form expectations. The approach is applied to the transactions demand for money in the United Kingdom and corroborates earlier work by the author by refuting a claimed expectations interpretation. Copyright 1988 by Royal Economic Society.