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Norwegian, American share Nobel price for economics
A 60-YEAR-OLD Norwegian don Finn Kydland has shared this year's Nobel Prize for Economics with his United States (U.S.) counterpart Edward Prescott, 63.
While Kydland teaches at Carnegie Mellon University and the University of California, Prescott works at Arizona State University and the Federal Reserve Bank of Minneapolis.
They were announced as joint winners yesterday for their research that laid the groundwork for more independent central banks and explained business cycles.
"Their work has not only transformed economic research, but has also profoundly influenced the practice of economic policy in general, and monetary policy in particular," the Royal Swedish Academy of Sciences said in its citation.
"It is the greatest possible accolade. There is no doubt about that," Kydland, told NTB news agency in Norway, where he is lecturing.
The duo will share the 10 million Swedish crown ($1.36 million).
Michael Crow, president of Arizona State University, praised Prescott's "great intellect, drive and commitment."
In the late 1970s and early 1980s the two men transformed analysis which, with its focus on changes in demand like investment and household consumption, had been unable to explain the widespread phenomenon of "stagflation" - the combination of high inflation with no growth and high unemployment.
Their 1977 article on the "time consistency problem", showed that policy makers tend to abandon longer-term aims to milk shorter-term benefits - for example, setting out to keep prices stable, but then fomenting inflation to reduce debt.
This helped to shift the focus of policy-making to independent and credible institutions, laying the groundwork for the creation of the European Central Bank, said John Hassler at Stockholm University.
"We have seen a move toward more independent central banks with various forms of inflation targets. This reform movement we think is a direct implication of the kind of research in Kydland and Prescott's first article," said Prof. Torsten Persson, chairman of the prize committee.
In 1982, the pair created a model showing that supply-side shocks - such as technological advances - are a driving force behind the business cycle rather than variations in demand alone.
"Whereas earlier research had emphasised macroeconomic shocks on the demand side of the economy, Kydland and Prescott demonstrated that shocks on the supply side may have far-reaching effects," said the Academy.
The economics award was not among the original prizes - for chemistry, physics, literature, medicine and peace -- founded by Alfred Nobel, inventor of dynamite, in his will in 1895.
It was instituted by Sweden's Central Bank in 1968 and first awarded the following year.`
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