Author Question: First, what is the Lucas critique? Second, explain how it might relate to the implementation of ... (Read 58 times)

maegan_martin · **on:** Jun 30, 2018

First, what is the Lucas critique? Second, explain how it might relate to the implementation of monetary policy.

What will be an ideal response?

Question 2

Discuss some of the implications of rational expectations.

What will be an ideal response?

aburgess · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

The Lucas critique refers to the argument made by Robert Lucas that using existing macro models to make predictions about the effects of proposed policy would not be successful. These models' predictions were based on previous relationships that, as Lucas noted, would no longer hold as new policy is implemented. When monetary policy is implemented, these models might predict, for example, increases in output. However, as we now know, expectations of the effects of these policies would change.

Answer to Question 2

Answers should include a discussion of the implications of rational expectations on: (1 ) our understanding of the behavior of consumption and financial market variables; (2 ) the determinants of wage and price setting behavior; and (3 ) the theory, implementation, and effectiveness of policy.