Kydland and Prescott's Nobel Prize: the methodology of time consistency and real business cycle models

James Hartley

Review of Political Economy, 2006, vol. 18, issue 1, 1-28

Abstract: Finn Kydland and Edward Prescott won the 2004 Nobel Prize in Economics for their work on time consistency and real business cycle models. What united the work in these two papers is the method of modeling the economy. In the mid-1970s, Kydland and Prescott set out to use optimal control theory in a rational expectations model, and ended up being credited with a sea change in the manner in which economists think about central banking. In the early 1980s, Kydland and Prescott set out to look at the effect of time-to-build and ended up being credited with a monumental change in the manner in which economists study the macroeconomy. An overview of their Nobel-meriting work both shows what they were trying to accomplish and how well they accomplished their aim.

Date: 2006
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DOI: 10.1080/09538250500353993

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