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rational. Lucas also assumes that all exchanges are done in such a way that
market clearing is assured. This would imply, as a result, that markets are
efficient.
In the long-term prices adjust entirely, in so far as a thorough monetary
shock is fully perceived by economic agents
Meanwhile in the short-term real
variables are affected, in the way established within the Phillips curve framework.
It should be acknowledged that Lucas underlined policy implications, regarding the
short-term effect of money in terms of real variables: output and employment.
However, market clearing has been a central issue for the avowed theory, being a
matter that can be put into question.
In Hall & Taylor (1988), it is possible to find an analytical framework worth
mentioning. They explain that sometimes money is taken as an exogenous
variable. This treatment conveys a long-term tradition in the field of
9
“The assumption that traders use the correct conditional distribution in forming
expectations, together with the assumption that all exchanges take place at the
market clearing price, implies that markets in this economy are
efficient
, as this
term is defined by Roll [1968]. It will also be true that price expectations are
rational
in the sense of Muth [1961].” Lucas (1972). Note: In the Lucas paper the
references to Roll and Muth are indicated by numbers. For the sake of clarity, here
these numbers have been substituted by the publication year, being added to the
present references section.
10
“If the factor disturbing the economy is exclusively monetary, then current price
will adjust
proportionally
to changes in the money supply.” Lucas (1972).
11
“This hedging behavior results in a non-neutrality of money, or broadly speaking
a Phillips curve, similar in nature to that which we observe in reality. At the same
time, classical results on the long-run neutrality of money, or independence of real
and nominal magnitudes, continue to hold.” Lucas (1972).
12
“This tension between two incompatible ideas -that changes in money are
neutral unit changes and that they induce movements in employment and
production in the same direction- has been at the center of monetary theory at
least since Hume wrote” Lucas (1996).