Robert E . Lucas , Jr . ’ s Collected Papers on Monetary Theory ∗

This paper is a critical review of and a reader’s guide to a collection of papers by Robert E. Lucas, Jr. about fruitful ways of using general equilibrium theories to understand measured economic aggregates. These beautifully written and wisely argued papers integrated macroeconomics, microeconomics, finance, and econometrics in ways that restructured big parts of macroeconomic research. 1 Arrow’s challenge and Lucas’s vision Arrow (1967, p.734-35) identified “the relation between microeconomics and macroeconomics as “one of the major scandals of price theory.” He doubted that the problem had been resolved “by what Samuelson has called ‘the neoclassical synthesis,’ in which it is held that achievement of full employment requires Keynesian intervention but that neoclassical theory is valid when full employment is reached.” Arrow asserted that “the mutual adjustment of prices and quantities represented by the neoclassical model is an important aspect of reality worthy of the serious analysis that has been bestowed on it” but that to understand depressions and economic development “something beyond, but including, neoclassical theory is needed.” Lucas describes Samuelson’s neoclassical synthesis as the core of a Keynesian economics that is remembered now only as a failed research program: ∗Edited by Max Gillman, 2013, Harvard University Press, Cambridge, Massachusetts and London, England. Sargent thanks Fernando Alvarez, Isaac Baley, Marco Bassetto, Anmol Bhandari, Ricardo Lagos, Francesco Lippi, Carolyn Sargent, and François Velde for helpful comments on earlier drafts of this review. Chapter 21, section titled “The Death of Keynesian Economics”.