Which of the following is a characteristic of the 'Lucas Critique'?
A. Policy evaluation based on historical correlations remains valid under policy changes
B. Rational expectations are irrelevant for policy
C. Econometric models based on past data may fail when policy regimes change because agents alter their behaviour
D. Only adaptive expectations matter
Answer: Option C
Solution (By JKSSB Mock Tests)
The Lucas Critique argues that the parameters of traditional econometric models are not policy-invariant because economic agents change their behaviour when policy rules change.
Explanation:
The Indian labour market is characterised by a large informal sector, dualism between formal and informal employment, and significant underemployment.
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