The chapter critiques the econometric approach to economic policy evaluation, arguing that it is fundamentally flawed. The author, Robert E. Lucas, Jr., highlights the conflict between the theoretical and econometric traditions in economic policy analysis. He contends that the econometric models, which are widely used for quantitative policy evaluation, are primarily designed for short-term forecasting and do not provide useful information about the actual consequences of alternative economic policies. Lucas emphasizes that the success of these models in short-term forecasting does not translate into reliable long-term policy evaluations. Lucas discusses the theoretical framework of economic policy, which assumes that the economy is described by a set of state variables, exogenous forcing variables, and random shocks. He argues that this framework is inconsistent with the behavior of real economies, particularly in the context of policy simulations. He suggests that the parameters of these models are not stable under changes in policy, leading to systematic "parametric drift." The chapter also examines specific economic behaviors, such as consumption, investment, and the Phillips curve, to illustrate the limitations of econometric models. Lucas demonstrates that these models fail to accurately predict the effects of policy changes, especially when the policy changes are not anticipated or understood by agents. He concludes that the econometric approach to economic policy evaluation is in need of major revision, and that the models used for policy simulation are fundamentally flawed.The chapter critiques the econometric approach to economic policy evaluation, arguing that it is fundamentally flawed. The author, Robert E. Lucas, Jr., highlights the conflict between the theoretical and econometric traditions in economic policy analysis. He contends that the econometric models, which are widely used for quantitative policy evaluation, are primarily designed for short-term forecasting and do not provide useful information about the actual consequences of alternative economic policies. Lucas emphasizes that the success of these models in short-term forecasting does not translate into reliable long-term policy evaluations. Lucas discusses the theoretical framework of economic policy, which assumes that the economy is described by a set of state variables, exogenous forcing variables, and random shocks. He argues that this framework is inconsistent with the behavior of real economies, particularly in the context of policy simulations. He suggests that the parameters of these models are not stable under changes in policy, leading to systematic "parametric drift." The chapter also examines specific economic behaviors, such as consumption, investment, and the Phillips curve, to illustrate the limitations of econometric models. Lucas demonstrates that these models fail to accurately predict the effects of policy changes, especially when the policy changes are not anticipated or understood by agents. He concludes that the econometric approach to economic policy evaluation is in need of major revision, and that the models used for policy simulation are fundamentally flawed.