Lucas Island Model: A 'Case Study' for Improving Students' Skill in Interpreting Macroeconomic Models

Abstract

This paper develops a teaching apparatus of Lucas's 1972 model aimed at improving students' ability to interpret the underlying structure of modern macroeconomics models. In this respect, the Lucas island model represents the perfect "case study" since it falls into the narrow range of mile stone "modern" macroeconomic models. Our teaching apparatus adds to the Lucas island model three distinctive features. First, it replaces the overlapping generation structure with the producer-shopper distinction within the household; second, it presents the classical perfect information case as the benchmark of the analysis and, finally, introduces a money market into the model.