"I love creating models and coming up with explicit structures I can play with," says Edward C. Prescott. "Economists create their own worlds. We're like little gods with our artificial economics, wanting to see what happens."
Last month Edward C. Prescott and Finn E. Kydland won the 2004 Nobel Prize in Economic Sciences for two important papers they coauthored that advanced the field of dynamic macroeconomics. As the Royal Swedish Academy of Sciences put it, Prescott and Kydland's work "has not only transformed economic research, but has also profoundly influenced the practice of economic policy in general, and monetary policy in particular."
More to the point, the two papers cited by the Swedish Academy hammered the final couple of nails in the coffin of Keynesian macroeconomic theory by changing the way economists think about the design of economic policy and the causes of business cycles. The first of the two papers singled out by the Swedish Academy, called "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," was published in 1977 in The Journal of Political Economy. The second paper, "Time to Build and Aggregate Fluctuations," appeared in Econometrica in 1982.
Prescott and Kydland have long been respected for successfully combining theory and applied economics. Their work together has focused on the interaction between theory and a society's aggregate statistics such as the level of unemployment, inflation and productivity. Prescott, an economics professor at the W.P. Carey School of Business at Arizona State University, has been a research adviser at the Federal Reserve Bank of Minneapolis for 23 years. Kydland is an economics professor at Carnegie Mellon University and the University of California, Santa Barbara. Kydland was initially a graduate student of Prescott's at Carnegie Mellon.
Between the Depression and the early 1970s Keynesian economic theory reigned.
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