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The original Lucas version of the new-classical macroeconomics combined the undeniable appeal of rational expectations with two more dubious assumptions inherited from Friedman , that is, continuous market clearing and imperfect information, to form the foundation of the famous “Lucas supply function” . Soon Sargent and Wallace extracted from Lucas’s model its implication for monetary policy, the famous “policy-ineffectiveness proposition.” The demonstration by Barro that one could interpret historical U.S. data to be consistent with the proposition and the theory brought new-classical economics to its shortlived period of peak influence. (en) |
