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Published byBernice Hart Modified over 8 years ago
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Rational Expectations and the Lucas Critique Scarth Chapter 5 Makroekonomi 2, S1, FEUI, 2009 – Arianto A. Patunru
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Intro Lucas started his critique to Keynes in a 1972 paper Sargent (1975) and Wallace (1976) took it up. Main result: “policy irrelevance”; ie. systematic AD policy has no effect on real variables even in the SR Scarth challenges this result; ie stabilization policy questions remain legitimate The extent to which a policy is anticipated or unanticipated matters Ratex does not rule out the role of errors. Only, there is no serial correlation among errors
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Statex and Ratex Compared
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Interpreting the AS Form (Eq 1) Keynesian: inverted EAPC combined with labor demand fn and production fn. Here, δ is stability condition. So deviation of output is due to deviation of LR labor supply schedules. Classical: Lucas supply fn. Error term disappears (all market clears all the time), wage flexible. Y-gap vanishes (but need to assume nonlinear adjustment cost for stability condition)
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AD and AS with Statex Policy via AD, as AS independent of monetary policy
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AD and AS with Ratex Policy parameters gone; hence “policy irrelevance”. As m increases, AD up one-for-one; expected price also goes up one-for-one; hence AD and AS shifts up together A to B immediately
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The Lucas Critique
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Sticky Wages and Prices
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Conclusions Agents are not stupid. Ratex is sensible. Intro to Ch 6: Keynesian policy proposals can come from a ratex analysis.
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