A former faculty member at the University received the Nobel Prize in Economics on Monday. Edward C. Prescott, currently an Economics Professor at Arizona State University, is the 78th Nobel laureate to be connected with University. He shared the 2004 prize with a Norwegian, Finn Kydland, of Carnegie Mellon University.
Prescott and Kydland won the prize for their work on “the time consistency of economic policy and the driving forces behind business cycles,” according to a statement from the Nobel Foundation. Their research demonstrated how the actions of households and businesses in anticipation of future economic policy could cause problems if policymakers do not follow through with the expected course. Even if traditional economics suggests a new course to be beneficial, it may hurt an unprepared populace if implemented too suddenly.
Kydland and Prescott showed how politics and reliability of policy, not just classical economics, need to be considered when drafting an economic plan. The pair also tied their theory to business cycles, explaining how the cycles can fluctuate with the prospective decisions businesses make and a myriad of other factors. Before this, economists tried to model the cycles purely with macroeconomic variables, such as the gross domestic product. Their research “largely influenced the reforms of central banks and the design of monetary policy in many countries over the past decade,” the Nobel statement concluded.
Prescott was a visiting professor in the Economics Department from 1978-79, and a faculty member from 1998-99. “He’s a great economist, great guy,” says Robert Lucas, a University Economics Professor and former colleague of Prescott. “He’s fun to work with; a very original thinker.” Prescott is the third 2004 laureate to have connections with Chicago. Last week, two alumnae, Frank Wilczek and Irwin Rose, won the Physics and Chemistry prizes, respectively.