Lucas islands model

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The Lucas islands model is an economic model of the link between money supply and price and output changes in a simplified economy using rational expectations. The model was formulated by Robert Lucas, Jr. in the paper "Expectations and the Neutrality of Money" about trade in two "physically separated markets".


  • The biggest step I ever made was, I guess, the "Expectations and the Neutrality of Money" paper in 1972, in the sense that this paper was for me and, (I think) for the profession, a big step from what other people had done. The economic logic of it was very much built on Phelps — the parable of an economy of islands — which wasn't my idea at all. But what Phelps got me thinking about was a general equilibrium model in which monetary shocks could induce people to work harder because of lack of information. It was a technically cool paper, it was hard to write, and it put me on the map as a theoretical economist.
    • Robert E. Lucas, in Ian P. King (2008) Interview: A conversation with Robert E. Lucas, Jr., nobel laureate in economics, 1995, New Zealand Economic Papers, 42:1

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