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The problem of efficiency of monetary policy in lucas theory of phillips curve

By Karel Brůna

Abstract

This article reviews the evolution of Lucas theory of Phillips curve. His theory is based on optimal decisions of subjects on supply of products or labor and full price and wage flexibility in competitive markets. In Lucas opinion Phillips curve expresses intertemporal substitution of consumption and leisure resulting from the changes of actual price level from the normal one. Systematic changes of supply can have long lasting real effects only when monetary policy can create permanent money illusion. That is what central banks really can do when expectations are formed adaptively. But subjects, who make rational expectations, know that systematic monetary policy rule do not create real aggregate demand shocks and leave their supply without any changes. To have a real effects money supply changes must be unexpected. Because subjects do not have enough information about current price level central bank can create temporal illusion of real price and wage changes.monetary policy, inflation, Phillips curve, aggregate supply, real growth

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