Lucas’ Equilibrium Account of the Business Cycle: Optimizing Behavior, General Equilibrium, and Modeling Rational Expectations

Robert E. Lucas Jr. is considered the “architect” of modern macroeconomics. His equilibrium approach to the business cycles has provoked a major change in the understanding of macroeconomic phenomena since the late 1960s. In this article we attempt to describe historically how he put together the main elements that formed the body of his theoretical framework, namely, the optimizing representative agent, the contingent-claim approach to general equilibrium analysis and the modeling of the rational expectation hypothesis. Lucas’ Expectations and the Neutrality of Money, published in 1972, is the first article containing all elements aforementioned. To reach such a result, he collaborated with Leonard Rapping in 1969 (their first article) and later developed a joint work with Edward Prescott in 1971. Furthermore, we also argue that the way Robert Lucas saw business cycles can be considered an inevitable progress in macroeconomics.