Policy Review And The Lucas Criticisms Essay - 919 Words

Policy Review and the Lucas Critiques Orthodox Keynesian economists believe that the change of the money supply will lead to the change of effective demand, and further result in the change of the economy. However, in the monetary economy cycle theories, the expected monetary supply changes will not influence the total economy; the unexpected money supply changes will impact the total economic in short term. In the long term, it merely impacts the changes of general price levels, instead of on the changes of total economy. Therefore, in the issues of controlling inflation, monetary economy cycle theory believes that the governments do not need to have to spend too many costs in the relative output and employment to control the inflation, only if the public trust that the monetary authorities will implement their monetary tightening policies. In addition, new classical macroeconomics further argues that political measures to improve the total output and reduce unemployment have to find ways in the supply part. Therefore, policies work only when they inspire the microeconomic units to provide more products and labors (Grabel, 2000). Under this background, the Luca critique drew attention from the world. Lucas (1976) argued in his article that changes in government policies would result in the changes of parameters in the macro econometric models. Therefore, it is ineffective to assess the effects of different policies based on large scale macro econometric model. It isShow MoreRelatedThe Relationship Between Inflation And Unemployment1662 Words   |  7 Pagesapproaches to point B, the unemployment rate tends to be low, but the price level goes up at the same time. According to the explanation, Samuelson and Solow believed that the policy used to intervene economy should be effective, because policymakers can chose a target point on the curve by conducting monetary and fiscal policy, which will be able to influence the aggregate demand. This model could well explain some past economic situations. 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