The Lucas Island Experiment

Denise Hazlett

Macroeconomics and Monetary Economics

Non-computerized experiment

This experiment demonstrates the effects on real aggregate output of anticipated versus unanticipated monetary policy. The experiment follows Lucas's (1972) description of unanticipated monetary disturbances leading to confusion about real values and hence to fluctuations in output. See Sargent (1996) for a description of the precursors to Lucas's idea, and of its legacy. In this experiment, students gradually learn how to anticipate monetary policy, based on past Federal Reserve behavior, and therefore render monetary policy ineffective.