On the “Lucasian” Production Function

On the basis of Lucas’ 1973 paper, Sargent and Wallace intruduced their ’surprise’ supply function in which there was a white noise error term introduced that cannot be predicted in any way. Lucas introduced the effects of nominal and real shocks affecting a macro-economy into his system through price expectations: if expectations are true, output in any given period is at its natural level. However, the well-known and widely accepted aggregate production function described by Sargent and Wallace also provides leeway for the white-noise shocks independent of price expectations—resulting in the accidental nature of equilibrium and in the inefficacy of countercyclical efforts of monetary policy.

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