Lucas s model is one of the pioneers

Lucas\'s model is one of the pioneers in the approach currently known as consumption-based asset pricing model. It was also the starting point to the tremendously famous Mehra and Precott (1985) paper on the equity premium puzzle. EMH and MDH have a clear relation with the rational expectation estrogen related receptor (RHE). If agents do not commit systematic forecasting errors and prices reflect all information available, and economic agents behave as if they know the true model of the economy, it is impossible for anyone to beat the market systematically. It is also impossible for the government, for example, to anticipate and smoothly burst a stock price bubble. All those results went under severe criticism after the 2008 subprime crisis. Lucas stated in his 2003 presidential address to the American Economic Association that “[…] macroeconomics in this original sense has succeeded: Its central problem of depression-prevention has been solved, for all practical purposes, and has in fact been solved for many decades (Lucas, 2003, p. 1). History promptly proved him wrong, and Queen Elizabeth\'s famous question to British economists about the crisis – “Why did nobody notice it”? – is painfully relevant. In an article published in The Economist, entitled “In defense of the dismal science”, Robert Lucas uses EMH to defend himself and traditional economic theory from those attacks. In a 2005 interview [Snowdon and Vane (2005: 301)], Lucas said; “My most influential paper on ‘Expectations and the Neutrality of Money’ [1972a] came out of a conference that Phelps organized where Rapping and I were invited to talk about our Phillips curve work”. Afterwards the interviewers asked him; “Do you consider your 1972 Journal of Economic Theory paper on ‘Expectations and the Neutrality of Money’ to be your most influential paper?” His answer was “It seems to be, or maybe the paper on policy evaluation [1976]”. Expectations and the neutrality of money, perceived by Lucas as his most influential paper, currently occupies the second position on the WoS ranking, and the third on Google and IDEAS. This work is truly a modern classic in the History of Economic Thought. It is a heavily mathematical work. Lucas first submitted it to the American Economic Review, but its anonymous referee argued in his report that one of the reasons to reject it was exactly because of its excessive mathematical content [Gans and Shepherd (1994)]. The Journal of Political Economy then published it. Lucas constructs an artificial economy (an explicit mathematical model) capable of mimicking [Lucas (1980a)] the apparent short-run trade-off between inflation and output/employment, while also respecting long-run classical dichotomy. Making use of Phelps\'s islands, Samuelson\'s overlapping generation model and Muth\'s rational expectations, all in consonance with Lucas and Rapping\'s (1969a,b) framework and Lucas and Prescott\'s (1971) definition of equilibrium. The paper was an innovative and sophisticated interpretation of Phelps and Friedman\'s natural rate hypothesis. It tried to explain the positive correlation between nominal and real variables through the incompleteness of information available to agents in the short run and the need to “extract signal” from observed price movements. It also corroborated the optimality of Friedman\'s k-rule of monetary policy. Lucas (1994 [1983]) argues that this paper influenced his research along three directions. “First, it was clear that Rapping\'s and my original view that our supply theory could be combined fairly easily with an IS-LM-type aggregate-demand theory was not working out as planned”. According to Lucas, because of the change from adaptive to rational expectations, it was no longer possible to investigate the behavior of a single market without making explicit reference to its interactions with the rest of the system. “Second, the construction of an explicit model economy undergoing what was in some sense a business cycle made it possible to see whether the econometric methods we were using… would give us the correct answers in a model economy about which we know everything. Here the answer was very clearly negative”. Thus, here we have the origin of Lucas\'s econometric critique and Lucas\'s (1972) econometric test of the natural rate of unemployment. Lucas says that the third direction is related to renewing his interest in pre-Keynesian business cycle theory, where he found not a set of bad theories, “but a sophisticated literature”. This third effect appears clearly in Lucas\'s polemical papers, where he insistently defends the hypothesis that Keynes\'s General Theory was a theoretical deviation from the classical approach to business cycles issues.