Abstract
This paper provides a look into what Lucas meant by the term ‘analogue systems’ and how he conceived making them useful. It is argued that any model with remarkable predictive success can be regarded as an analogue system, the term is thus neutral in terms of usefulness. To be useful Lucas supposed models to meet further requirements. These prerequisites are introduced in two steps in the paper. First, some properties of ‘useless’ Keynesian macroeconometric models come to the fore as contrasting cases. Second, it is argued that Lucas suggested two assumptions as the keys to usefulness for he conceived them as referring to genuine components of social reality and hence as true propositions. One is money as a causal instrument and the other is the choice-theoretic framework to describe the causal mechanisms underlying large-scale fluctuations. Extensive quotes from Lucas’s unpublished materials underpin the claims.
Highlights
This paper is about how and why Lucas insisted on the use of money and the neoclassical choice-theoretic framework as assumptions to construct useful analogue systems in his business cycle theory
This paper provides a look into what Lucas meant by the term ‘analogue systems’ and how he conceived making them useful
It is argued that any model with remarkable predictive success can be regarded as an analogue system, the term is neutral in terms of usefulness
Summary
This paper is about how and why Lucas insisted on the use of money and the neoclassical choice-theoretic framework as assumptions to construct useful analogue systems in his business cycle theory. As the main message of the paper it is argued that Lucas insisted on these presumptions for he conceived them as true propositions: for him large-scale fluctuations stemmed from agents’ responses to monetary shocks. Some parts of this story are well-known, the primary attention below is paid to why and how Lucas imputed elements of reality into his descriptively unrealistic assumptions and to some causal implications.
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