Thread.

The reverse migration of labourers from Delhi after the lockdown in India, clearly caught the government on the wrong foot.

I find that the Lucas critique of macro policies in the 1970s is a useful framework to understand this phenomenon and draw lessons from it.

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Keynesian policymakers in the 70s assumed that consumption (and other) economic behaviour was stable.

This meant that their model parameters describing the consumption function, based on the past data, remained unchanged even when (fiscal or monetary) policies were changed.

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But the models did not work well.

Lucas pointed out that this was due to the fact that people with rational behaviour would change their consumption as a reaction to the policies adopted.

This could and would completely nullify the expected impact of the policy.

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This idea led to a revolution in macroeconomics with *micro-foundations* becoming the standard way to approach policy analysis.

This meant taking into account the fact that people’s rational reaction to a policy is based on their perception of their best self-interest.

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In the case of the lockdown in India, the only existing information that policymakers had, was from the experience of other countries.

Based on that, the policymakers expected the lockdown to result in near-complete isolation of the population.

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But this failed to take into account the change in human behaviour as a result of the policy.

Clearly, the daily wage earners perceived the reverse migration as their best self-interest under the circumstances.

This negated the full impact of the lockdown policy.

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In line with the Lucas critique, the main failure here was to not work out the micro-foundations of this policy.

Hopefully, the policymakers will learn from this and any policy that they adopt now will work out the micro-foundations as well.

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