SummaryTraditionally, macroeconomics had been the realm of the Keynesians, whereas classical precepts had traditionally been applied to microeconomics and aggregated to have a shot at macro. NCM takes and applies this basis to develop a clear and coherent set of principles that aim to explain the major players, unemployment and inflation, from a fully neoclassical perspective.
Robert Emerson Lucas, Jr., born in 1937, is an American economist and Professor at the University of Chicago. For many, Lucas is probably one of the most notable economists of all times and one of the most influential economists since the late 1970s. It was in the year 1995 when he won the Nobel Prize of Economic Sciences for his development and utilisation of the rational expectations hypothesis, which has transformed macroeconomic analysis.
Robert Lucas is one of the leading figures of the New Classical Macroeconomics, which defies Keynesian economics approach that previously ruled macroeconomic theory. We can date New Classical Macroeconomics birth from Lucas´s work made in 1973, “Some International Evidence on Output-Inflation Tradeoffs”. He builds macroeconomic models using microeconomic foundations such as market clearing and the optimization by economic agents. He regards the economy as having a dynamic equilibrium with economic cycles.
He has worked with great interest in the implications of rational expectations, and formulated his own supply function in which aggregate output for a given period depends on the expectations of prices based on information available at the end of that period. Indeed, these ideas, shown in Robert Lucas’ 1972 paper “Expectations and the Neutrality of Money”, in which he used Edmund Phelps’ island parable (though applying rational, instead of adaptive, expectations), gave strong significance to the use of rational expectations in macroeconomics analysis.
Robert Lucas´s influential “Econometric Policy Evaluation: A Critique”, 1976, had a deep effect on both policy modelling and econometric practice in general. Lucas stands out the implication that parameters may be subject to change when policy does so, thus, opposing to the previous vision were the parameters were thought as being structural never mind changes in economic policy; this is known as the Lucas Critique.