Economics, Econometrics and Finance
8 years ago

Unemployment and Inflation Relationship Reimagined Through Rational Expectations Model

History of Political Economy
Lucas's Research in the Late 1960s and the Natural Rate of Unemployment
Danilo Freitas Ramalho da Silva

Paper Summary

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The article discusses how Robert E. Lucas Jr. studied the natural rate of unemployment in the late 1960s. He shifted from using adaptive expectations to rational expectations with the help of Edmund Phelps and Edward Prescott. Phelps criticized the old model and introduced Lucas to a new one, while Prescott helped refine the new hypothesis. This change led Lucas to test the natural rate of unemployment differently, focusing on the relationship between policy and behavioral parameters.