Answer to Question #55077 in Macroeconomics for Deepti

Question

Lucas' point of view, what are the limitations of Keynesian model?what limitations does he suggest?

Answer 1

Lucas limitations:
- business cycles are not driven by demand, business cycles are driven by changes in technology and supply;
- policy regime change, so economic models which are based on policy regime, are unstable;
- changes in employment are based on worker preferences for leisure time. Decreases in employment are voluntary choices of workers to reduce their work effort in response to the prevailing wage
monetary policy only matters when it causes people to be surprised or confused by the price of goods changing relative to one another;
- producers become aware of changes in their own industries before they recognize changes in other industries;
- employment levels changed because these technological and productivity changes altered the desire of people to work;
- rejection the idea of high involuntary unemployment in recessions and not only dismissed the idea that money could stabilize the economy but also the monetarist idea that money could destabilize it
dismissed the need to explain business cycles with price surprise, market failure, price stickiness, uncertainty, and instability.