A Study on Lucas’ “Expectations and the Neutrality of Money”—II

DOI: 10.4236/tel.2013.33028   PDF   HTML   XML   3,930 Downloads   5,637 Views   Citations

Abstract

My preceding paper on this topic (Otaki [1]) explored whether the equilibrium existence proof in Lucas [2] is truly complete. We showed that the proof is incomplete that some additional conditions are required to complete the job. In this paper, we explore another ambiguity in Lucas’s model, which has been pointed out by Grammond (see Lucas [3]): can the model transform the joint probability density function of the exogenous environment into one that which includes market equilibrium information? This problem is peculiar to the signal extraction problem compatible with the market equilibrium condition. The result indicates that although Lucas [3] was fundamentally correct in refuting Grammond’s critique, the model contains another crucial assumption concerning the property of the equilibrium function, namely, one-to-one correspondence from the environmental variable to the equilibrium price, which has not been proved by Lucas [2] to date.

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M. Otaki, "A Study on Lucas’ “Expectations and the Neutrality of Money”—II," Theoretical Economics Letters, Vol. 3 No. 3, 2013, pp. 168-170. doi: 10.4236/tel.2013.33028.

Conflicts of Interest

The authors declare no conflicts of interest.

References

[1] M. Otaki, “A Study on Lucas’ ‘Expectations and the Neutrality of Money’,” Theoretical Economics Letters, Vol. 2, No. 5, 2012, pp. 438-440. doi:10.4236/tel.2012.25081
[2] R. E. Lucas Jr., “Expectations and the Neutrality of Money,” Journal of Economic Theory, Vol. 4, No. 2, 1972, pp. 103-124. doi:10.1016/0022-0531(72)90142-1
[3] R. E. Lucas Jr., “Corrigendum on ‘Expectations and the Neutrality of Money’,” Journal of Economic Theory, Vol. 31, No. 1, 1983, pp. 197-199. doi:10.1016/0022-0531(83)90031-5

  
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