Lucas islands model
The Lucas islands model is an economic model of the link between money supply and price and output changes in a simplified economy using rational expectations. The model was formulated by Robert Lucas, Jr. in the paper "Expectations and the Neutrality of Money" about trade in two "physically separated markets".
Quotes
edit- The biggest step I ever made was, I guess, the "Expectations and the Neutrality of Money" paper in 1972, in the sense that this paper was for me and, (I think) for the profession, a big step from what other people had done. The economic logic of it was very much built on Phelps — the parable of an economy of islands — which wasn't my idea at all. But what Phelps got me thinking about was a general equilibrium model in which monetary shocks could induce people to work harder because of lack of information. It was a technically cool paper, it was hard to write, and it put me on the map as a theoretical economist.
- Robert E. Lucas, in Ian P. King (2008) Interview: A conversation with Robert E. Lucas, Jr., nobel laureate in economics, 1995, New Zealand Economic Papers, 42:1
