Rational expectations Lucas is well known for his investigations into the implications of
rational expectations in macroeconomic theory.
John Muth had published "Rational Expectations and the Theory of Price Movements" in 1961 at the same faculty in Carnegie Tech. Lucas (1972) incorporated the idea of rational expectations into a dynamic macroeconomic models. The agents in Lucas's model are rational: based on the available information, they form expectations about future prices and quantities, and based on these expectations they act to maximize their expected lifetime utility. He also provided sound theoretical foundations to
Milton Friedman and
Edmund Phelps's view of the long-run
neutrality of money, and provided an explanation for the then observed correlation between output and inflation, depicted by the
Phillips curve, while illustrating that the existence of this empirical relationship did not yield a possibility of a policy trade off. arguing that a
macroeconomic model should be built as an aggregated version of
microeconomic models while noting that aggregation in the theoretical sense may not be possible within a given model. He formulated the "Lucas critique" of economic policymaking, which holds that relationships that appear to hold in the economy, such as an apparent relationship between inflation and unemployment, could change in response to changes in economic policy. The reformulation influenced the development of
new classical macroeconomics and the drive towards
microeconomic foundations for macroeconomic theory.
Other contributions Lucas developed
a theory of supply that suggests people can be tricked by unsystematic monetary policy; the
Uzawa–Lucas model (with
Hirofumi Uzawa) of human capital accumulation; and the "
Lucas paradox", which considers why more capital does not flow from developed countries to developing countries. Lucas (1988) is a seminal contribution in the economic development and growth literature. Lucas and
Paul Romer heralded the birth of
endogenous growth theory and the resurgence of research on economic growth in the late 1980s and the 1990s. Lucas also contributed foundational contributions to behavioral economics, and provided the intellectual foundation for the understanding of deviations from the
law of one price based on the irrationality of investors. In 2003, he stated, about five years before the
Great Recession, that the "central problem of depression-prevention has been solved, for all practical purposes, and has in fact been solved for many decades." Lucas also proposed the
Lucas Wedge which tries to show how much higher GDP would be in the presence of proper policy. == Personal life ==