Lucas Model

The Lucas Model, developed by economist Robert Lucas, explains how people's expectations influence economic outcomes. It suggests that individuals and businesses make decisions based on their understanding of the economy, which can change over time as they learn and adapt. Because everyone anticipates policy changes or economic shifts, their reactions can neutralize intended effects, making economic policies less predictable and less effective. Essentially, the model highlights the importance of expectations in shaping economic behavior and highlights that well-understood policies are often already "priced in," reducing their impact.