Tests of Policy Ineffectiveness in Macroeconometrics∗

This paper considers tests of the null hypothesis of the ineffectiveness of a policy intervention, defined as a change in the parameters of a policy rule, in the context of a macroeconometric dynamic stochastic general equilibrium (DSGE) model. This is an ex post evaluation of an intervention in a single country, where data are available before and after the intervention. The tests are based on the difference between the realisations of the outcome variable of interest and counterfactuals based on no policy intervention, using only the pre-intervention parameter estimates, and in consequence the Lucas Critique does not apply. We show that such tests will have power to detect the effect of a policy intervention on a target outcome variable that changes the steady state value of that variable, e.g. the target inflation rate. They will have less power against interventions which do not change the steady state, since these typically only have transitory effects. Asymptotic distributions of the proposed tests are derived both when the post intervention sample is fixed as the pre-intervention sample expands, and when both samples rise jointly but at different rates. The performance of the test is illustrated by a simulated policy analysis of a three equation New Keynesian Model.