Rational Expectations And The Lucas Critique

According to Phillips curve, one could achieve and maintain a permanently low level of unemployment merely by tolerating a permanently high level of inflation. As you can recall from Phillips curve, the cost of reducing inflation is often measured by the sacrifice ratio, which is the number of percentage points of GDP that must be forgone to reduce inflation by 1 percentage point. Because these estimates of the sacrifice ratio are often large, they lead some economists to argue that policymakers should learn to live with inflation, rather than incurring the large cost of reducing it. According to advocates of the rational expectations approach, however, these estimates of the sacrifice ratio are unreliable because they are based on adaptive expectations, so they are subject to the Lucas critique.