Nobel laureate Robert Lucas who revolutionized macroeconomics

His work forms the basis of modern macroeconomic theory. How policy, especially monetary policy, should be formulated clearly stems from his research and writings. But its influence goes far beyond this. His work was instrumental in reconciling the previously divergent approaches of microeconomics and macroeconomics. It helped develop the discipline of economics into a coherent and logical framework of inquiry.

Lucas is best known for “developing and applying the rational expectations hypothesis, and thereby transforming macroeconomic analysis and deepening our understanding of economic policy”, as announced in the 1995 Nobel Prize.

The idea that people change their expectations based on policy and therefore cannot be fooled by policy surprises is so well understood today that it needs no further explanation. An important consequence of his work is that it has reduced policy ad hocism. Notably, monetary policy making around the world has become largely rule-based. He embedded this idea of ​​rational expectations in an equilibrium framework in a paper, ‘Investment under uncertainty’, in 1971 with his longtime collaborator Edward Prescott, another veteran macroeconomist and Nobel laureate who recently passed away. Did. However, the most influential paper in this regard, as acknowledged by Lucas himself, is the 1972 paper ‘Expectations and the neutrality of money’.

During this period in the 1970s, Lucas not only revolutionized the way we think about macro questions such as recession and policymaking, but also developed a framework for analyzing macro issues. He and his colleagues worked in two dimensions – embedding macro problems within the general equilibrium framework and studying the dynamics. There were two versions of the general equilibrium model, one developed by the likes of Arrow, DeBru and McKenzie with infinitely many living agents, and one developed by Samuelson with overlapping generations. He used both. This framework, further developed by others (notably Brock and Mirman (1972) and Kidland and Prescott (1982)), remains a mainstay of macroeconomic models, which now include the ubiquitous and computable dynamical stochastic general equilibrium (DGE). DSGE) models.

The great mind that he was, he did not limit his curiosity to the short-term ups and downs of the economy, but asked very important questions about the long-term development process. In his influential paper, “On the Mechanics of Economic Development,” published in 1988, he asked why some countries are rich and others poor—a question he considered so important that “once one begins to think about If so, it becomes difficult to think. about anything else”. Even today, I often ask my students, “Why doesn’t capital flow from rich countries to poor countries?” to get them to think about cross-country variations when teaching about development. To inspire.

These questions gave rise to a large body of papers that greatly improved our understanding of the development process, even though his own model with human capital was not the most widely accepted within the profession. An important result of his work on development was that it produced unified models for developed and developing countries alike, just as he brought together micro-assumptions and macro-questions when formulating models with rational expectations.

Lucas worked on and influenced many other subjects. Although some of these may not be discussed in popular writings, they have deeply influenced researchers. My personal favorite is his 1978 paper ‘Asset Prices in an Exchange Economy’. He has also written about the size distribution of firms, search, unemployment and incomplete information, among other topics. One aspect of his letters is his lucid writing, which conveys astonishing clarity of thought.

It would be remiss if I didn’t mention one of his books that I think deeply influenced the profession. Co-written with his partner Nancy Stokey and in collaboration with Edward Prescott, ‘Recursive Methods in Economic Dynamics’ provided the foundation for dynamical macroeconomics and was used to train generations of macroeconomists. Unlike most of his papers, which are quite accessible, albeit mathematically sophisticated, this one requires little investment from the reader, but yields bountiful returns. I can clearly remember the frustration and joy of working through this book during my PhD program at the University of Minnesota.

While there, in Minnesota, I had the opportunity to meet and interact with him, albeit in a limited way. Even though he spent most of his career at the University of Chicago, his alma mater, he was associated with the Federal Reserve Bank of Minneapolis and, on its grounds, with the Department of Economics in Minnesota.

He spent a lot of time there in the late 1990s and early 2000s. I joined the PhD program in Minnesota during that period and met him for the first time within a month or so. It was the beginning of the academic year and faculty members and graduate students gathered on the banks of the Mississippi, which ran across campus. By then, I knew most of the people in the department, but was still getting to know everyone. There were one or two new faces. Somebody introduced me to one of these – Bob Lucas! As someone who has studied economics a little bit, I knew Lucas through Reasonable Expectation and the Lucas Critique and knew he was a Nobel laureate. And there I was talking to her! He was welcoming and kind.

After this, I would see him in seminars. He asked questions, was somewhat critical of what was being presented, but was always helpful. During that period, I also saw him present a paper – not on rational expectations, business cycles, long-term growth or anything that we know him for. It was on the spatial structure of cities that showed the range of his thinking.

The Nobel citation states, “Robert Lucas is the economist who has had the greatest influence on macroeconomic research since the 1970s.” is no longer with us.

The writer is professor of economics at the Shiv Nadar Institution of Eminence.