The Nobel Prize in Economics, 2004
It is with great honor that I learned about the Nobel Prize in Economics for 2004. As you may have heard, the recipients are Finn Kydland from Carnegie-Mellon University and Edward C. Prescott, formerly of the University of Minnesota.
I have a special interest in this year's Nobel prize. Finn is a former teacher of mine from GSIA. He taught me Dynamic Competitive Analysis. I vividly remember his corner office in GSIA, his wry humor and also his sharp intellect. Edward Prescott was my colleague at the Department of Economics at the University of Minnesota for 10 years, between 1984 and 1994. My hiring at the University of Minnesota also deserves some mention. As some of you may know, my thesis was on estimating the model in one of the papers for which Kydland and Prescott received their Nobel, "Time-to-Build and Aggregate Fluctuations."
I was only a second-year graduate student when I undertook this task, and it formed the basis for my thesis from Carnegie-Mellon University. The model was badly rejected - somewhat to the delight of macroeconomists of a more Keynesian bent! But that thesis propelled me to job interviews at Chicago, MIT, Northwestern, UCLA, and so on and to an initial position at the University of Minnesota. Actually I was hired more on the advice of Thomas Sargent and Christopher Sims, who felt that economic models should be subject to formal econometric and statistical testing.
The field of macroeconomics has changed in enormous ways due to Kydland and Prescott's contributions. As I like to tell my Money & Banking students, the earlier piece by Kydland and Prescott on time-inconsistency in monetary policy started up a vast literature that had the effect of instituting new policy to tame and control inflation in developed countries. Likewise, the 1982 Econometrica paper by Kydland and Prescott started up the school of Real Business Cycle Analysis, of which I like to think that I am a part. This literature evolved in different ways. Talented and creative individuals pursued the initial Kydland-Prescott research in both theory and empirics. My own interests led me to panel data estimation and recently, back to investment theory. Not content with the initial rejection of the model, many researchers also pursued the econometric analysis of RBC models. I was recently at an ECB conference where 20 years after my own work, researchers at the ECB were using dynamic equilibrium models to discuss forecasting and monetary policy analysis.
I am truly delighted at the Nobel Prize being conferred on my former teachers and colleagues. Their ideas inspired a generation of individuals with some of the best minds in Economics.