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Lucas claimed that when guidelines change or new policies are implemented, public anticipations are likely to change. The implication of this statement is that: relationships established using econometric ideals also change.
What was the main transmission of the Lucas model?
The Lucas islands model is a financial model of the link between money supply and price and output changes in a simplified economy using rational expectations. It produced a new classical explanation of the Phillips curve relationship between unemployment and inflation. The financial model was formulated by Robert Lucas, Jr.
Since then, rational expectations standards have become a fixture in macroeconomics − Euler equations in particular.
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