Kydland and Prescott win Nobel
By Arnold Kling
This year’s Nobel Prize in economics was awarded to Finn E. Kydland and Edward C. Prescott for their work on time inconsistency of economic policy and real business cycles. The press release describes these discoveries as
If economic policymakers lack the ability to commit in advance to a specific decision rule, they will often not implement the most desirable policy later on…
In their business-cycle model, realistic fluctuations in the rate of technological development brought about a covariation between GDP, consumption, investments and hours worked close to that observed in actual data.
I like a lot of Prescott’s work. However, I never liked the “expectations” model of employment fluctuations that was the basis for the time-consistency story. That is, I just don’t think of our decentralized markets as producing decisions about wage offers that are based on predictions of monetary policy. There are too many other things for individual actors in the economy to worry about.
UPDATE: So far, the best mainstream media piece I’ve seen on the Nobel winners is David Henderson’s in the Wall Street Journal. My favorite blog pieces have been at Marginal Revolution (here, here, here, and here); and at David Tufte (here and here).
For Discussion. Does the work of Groshen and Potter, which points out that relatively few workers are on temporary layoff and more job losses reflect permanent restructuring, suggest that a “real” or “supply-side” model of a recession is particularly appropriate today?