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My preceding paper on this topic Otaki1 explored whether the equilibrium existence proof in Lucas 2 is trulycomplete. We showed that the proof is incomplete that some additionalconditions are required to complete the job. In this paper, we explore anotherambiguity in Lucas’s model, which has been pointed out by Grammond see Lucas3: can the model transform the joint probability density function of theexogenous environment into one that which includes market equilibrium information?This problem is peculiar to the signal extraction problem compatible with themarket equilibrium condition. The result indicates that although Lucas 3was fundamentally correct in refuting Grammond’s critique, the model containsanother crucial assumption concerning the property of the equilibrium function,namely, one-to-one correspondence from the environmental variable to theequilibrium price, which has not been proved by Lucas 2 to date.

KEYWORDS

Signal Extraction Problem Compatible with the Market Equilibrium; Transformation of the Joint Distribution Function; One-to-One Correspondence from the Environmental Variable to the Equilibrium Price

Cite this paper

M. Otaki -A Study on Lucas’ -Expectations and the Neutrality of Money-—II,- Theoretical Economics Letters, Vol. 3 No. 3, 2013, pp. 168-170. doi: 10.4236-tel.2013.33028.





Author: Masayuki Otaki

Source: http://www.scirp.org/



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