Prescott, Kydland Win Nobel Prize Summary

Edward C. Prescott, a 63 year old professor at the Arizona State University and Finn Kydland, a 60 year old Norwegian professor were awarded the Nobel Prize for there economic studies, particularly on monetary policy. Finn Kydland teaches at Carnegie Mellon University in Pittsburgh and also at the University of California at Santa Barbra. Prescott and Kydland frequently collaborate on their economic policy studies. Banks around the world undertook reforms recently do to low and stable inflation because of what their studies found. What their studies found came in a paper written in 1977 called: "Rules Rather than Discretion: The Inconsistency of the Optimal Plans." In their paper Prescott and Kydland took a fine look at how, "government policy makers invited long-term problems when they strayed from their goals to address short-run problems." As you can imagine they applied their theory to every thing under the sun but it was in central banking that they found the most profound results. The results started a banking movement "to make central banks more independent and thus less prone to be influenced by elected officials." In other words banks were to put up blinders, if you will, to stay a course, and focus on goals. In 1982 John Maynard Keynes was thought to be at the fore front of economic policy especially concerning the business cycle. He thought economic "booms and bust" were a result of changes in demand by consumers and businesses. Around this time Prescott and Kydland began challenging the teaching of Keynes. What they found is that broad shifts were due largely by changes in productivity. Such as new technology or a surge in oil prices can cause a recession or an economic boom. Although Prescott and Kydland's ideas were new and different at the time they make sense to me. Take for example I am planning to buy a car so I will save for the next two years (long term) but these really cool HDTVs or new iPODs that have movies on them start coming out and I buy one of each (short-term distraction). If I had applied my situation to Prescott and Kydland's teaching I wouldn't have been distracted and kept my long term goals. I think many people disagree with their teaching because its hard to prove. There are a lot of outside factors that cause recession and booms and for that reason this will always be an argument.