Lucas’s way to his monetary theory of large-scale fluctuations

ABSTRACT This introductory paper offers a look into the intellectual and technical progress that led Robert E. Lucas to his seminal paper entitled Expectations and the neutrality of money. It is argued that the neutrality paper applies the capital-theoretic approach of Lucas’s firm microeconomics of the mid-1960s to the representative agent’s labour supply decision. While emphasizing this similarity, the study gives an overview of the steps through which Lucas changed the basic decision problem of adjusting to price changes from a static Marshallian setting into his neo-Walrasian dynamic stochastic general equilibrium framework. Extensive references to Lucas’s unpublished materials underpin the claims.