The term itself was first used by continental economists beginning at the turn of the 20th century, and exploded as a special topic in the English language economic literature upon Friedrich Hayek's introduction of the term[4] and concept in his famous 1931 LSE lectures published as Prices and Production.
Furthermore, the floor on nominal wages changes imposed by most companies is observed to be zero: an arbitrary number by the theory of monetary neutrality but a psychological threshold due to money illusion.
In the end, the economy, after this short detour, will return to the starting point, or in other words, to the natural rate of unemployment.
For Lucas, the islands model made up the general framework in which the mechanisms underlying the Phillips curve could be scrutinized.
Doing so, monetary policy would increase the money supply in order to eliminate the negative effects of an unfavourable macroeconomic shock.
However, monetary policy is not able to utilize the trade-off between inflation and real economic performance, because there is no information available in advance about the shocks to eliminate.
Under these conditions, the central bank is unable to plan a course of action, that is, a countercyclical monetary policy.
Rational agents can be conceited only by unexpected changes, so a well-known economic policy is completely in vain.
However, and this is the point, the central bank cannot outline unforeseeable interventions in advance, because it has no informational advantage over the agents.
[7] The New Keynesian research program in particular emphasizes models in which money is not neutral in the short run, and therefore monetary policy can affect the real economy.