Studies in Monetary Theory

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9408649 Lucas For the first time since explicitly dynamic macroeconomic models were first developed in the 1930s, we have available a class of theories that are squarely in the general equilibrium tradition; built up from assumptions on preferences, technology, and market structure. In the ten years since the introduction of the first real business cycle model, a great deal of useful theoretical and computational experience has been accumulated, evidence from a wide range of sources has been brought to bear on key parameters, and people have begun to apply the standard methods of neoclassical welfare analysis to macroeconomic questions. These are exciting and promising technical developments, but they have been bound together with a particular substantive view of the nature of business cycles: that productivity changes have been the main source of economic instability. As a result, macroeconomists who are convinced of the importance of monetary shocks and nominal rigidities have made little use of these developments. This project addresses the question of how to best integrate the analysis of real and monetary forces in a general equilibrium framework with well- specified microfoundations. This project pursues theoretical research on the business cycle effects of monetary instability. A framework is proposed for a unified treatment of the economy's response to productivity shocks and of market malfunctions that transmit monetary disturbances in other sectors of the economy. The potential of this framework in accounting for the behavior of production, prices, and interest rates is described, Some central questions are identified, and a program of theoretical, numerical, and empirical research on these question is pursued.