Lucas aggregate supply function: Difference between revisions

Revision as of 02:58, 25 February 2015

Revision as of 03:00, 25 February 2015

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:<math>Y_s = f(P-P_{expected})</math>

The simple version models aggregate output as a function of the price surprise. A more complicated expression of the Lucas supply curve adds expectations to the model. Aggregate supply is a function of the natural[[Potential output|“natural” level of output]] (<math>Y_{N_t}</math>) and the difference between actual prices (<math>P_t</math>) and the expected price level given past information <math>\Omega_{t-1}</math> times a coefficient based on an economy's sensitivity to price surprises (<math>\alpha</math>):<ref>Snowdon and Vane (2005), 234.</ref>

:<math>Y_s = Y_{N_t} + \alpha [ P_t - E\left(P_t | \Omega_{t-1} \right) ] </math>