Thomas J. Sargent Quote

My recollection is that Bob Lucas and Ed Prescott were initially very enthusiastic about rational expectations econometrics. After all, it simply involved imposing on ourselves the same high standards we had criticized the Keynesians for failing to live up to. But after about five years of doing likelihood ratio tests on rational expectations models, I recall Bob Lucas and Ed Prescott both telling me that those tests were rejecting too many good models.

Interviewed by George W. Evans Seppo Honkapohja, Macroeconomic Dynamics, 9, 2005, 561–583.