American, Norwegian Share Nobel in Economic Sciences

An American and a Norwegian won the Nobel Memorial Prize in Economic Sciences on Monday for adding to the understanding of the business cycle and how government policymakers should try to influence it.

Their research laid the groundwork for modern central-bank policies.

Edward C. Prescott, 63, a professor at Arizona State University, and Finn E. Kydland, 60, a Norwegian who teaches at UC Santa Barbara and Carnegie Mellon University, will share the $1.36-million prize, which has been dominated by American scholars in recent years.

Prescott and Kydland made fundamental contributions to business-cycle analysis as well as to the practice of monetary and fiscal policy in many countries, the Royal Swedish Academy of Sciences said in its citation.

Their work has had a tremendous effect on how policymakers, such as central bankers, forecast the direction of an economy, said Allan H. Meltzer, a professor at Carnegie Mellon and an authority on interest rate policy. “It’s really a great choice.”

The Royal Swedish Academy credited the two scholars with “fundamental contributions of great significance,” such as clarifying the importance that technology, energy price shocks and other variables can have on an economy.

The men have collaborated since the early 1970s, when Prescott was Kydland’s advisor at Carnegie Mellon. They concentrated on areas with practical meaning for policy, such as how collective decisions of households, business and government officials lead to expansions or slumps.

Their findings became especially important after the 1970s, when traditional economic analyses failed to explain stagflation, a condition marked by rising prices and sluggish growth.

Until the 1970s, economists had no routine methods to incorporate such developments as technological change into their models for the future, experts said. But Prescott and Kydland made a lasting contribution by raising awareness of the “supply” side of the economy, which at the time was bewildering many economists during a period of oil price shocks and stagflation.

Those insights continue to shape the thinking of government policymakers. Their work “is at the core of most business-cycle modeling these days,” Meltzer said.

UC Santa Barbara officials were delighted, noting that Kydland joined their faculty July 1 and that Prescott was a visiting professor there last year.

Kydland is the fifth UCSB faculty member to win a Nobel since 1998. He is on leave of absence from Carnegie Mellon.

“This is a wonderful and fitting recognition of the tremendous impact his research has had on macroeconomics, international economics and monetary economics,” UCSB Chancellor Henry T. Yang said.

Kydland, who is visiting Norway, told the Associated Press that he learned about the prize while lecturing students at the Norwegian School of Economics and Business Administration in Bergen.

“I was a little perturbed when they interrupted my lecture until I got to the secretary’s office and found out what the phone call was about,” he said. “It is wonderful to get this recognition.”

Prescott, who became the fifth American to receive the award since 2000, said he got the good news in a 4 a.m. phone call.

“I am honored and thank all those that have helped me, in particular Finn Kydland,” said Prescott, who also serves as a senior monetary advisor for the Federal Reserve Bank of Minneapolis.

“The money is nice, but I am not in this game for the money. I am in it because I love doing it -- figuring things out and interacting with students and colleagues.”

Said Gary Stern, the Minneapolis Fed president: “Ed’s contributions to economics have not only fueled advances in theoretical work but have also had profound impacts at a policy level -- as we at the Minneapolis Fed know from personal experience.”*

Times staff writer Warren Vieth in Washington contributed to this report.