Norwegian, American win Nobel prize for economics

‘‘It is the greatest possible accolade. There is no doubt about that,’’ Kydland, who teaches at Carnegie Mellon University and the University of California, told NTB news agency in Norway, where he is lecturing. Kydland, 60, shares the 10 million Swedish crown ($1.36million) prize with Prescott, 63, who works at Arizona State University and the Federal Reserve Bank of Minneapolis.

“I am honored and thank all those that have helped me, in particular Finn Kydland,” Prescott said in a statement.

“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,” he added.

Prescott could not immediately be reached but Michael Crow, President of Arizona State University, praised his “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.

“It’s like a drunkard that goes to a bar — if he goes to the bar with money in his pocket, he will drink,” said Professor John Hassler of Stockholm University.

This helped shift the focus of policy-making to credible independent institutions, laying the groundwork for the creation of the European Central Bank, he said.

“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 Professor Torsten Persson, chairman of the prize committee.

In 1982 they 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 emphasized 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.

Thanks to their work, policy makers can simulate the effect a policy change in one area will have on another. “Central banks, international organizations and others who make advanced business cycle forecasts have begun to analyse cyclical phenomena using variants of the models initiated by Kydland and Prescott,” the Academy said. —Reuters