Case alum shares Nobel Prize in Economic Science
First Nobel Laureate for Weatherhead School of Management co-authored theory on business cycles, economic policies
October 14, 2004 | For more information: Susan Griffith (216)-368-1004
 Edward C. Prescott, a 1964 master’s of science graduate in operations research from Case Western Reserve University, shares the 2004 Nobel Prize in Economic Science with Finn E. Kydland from Carnegie Mellon University and the University of California at Santa Barbara for their theory on business cycles and economic policies.
Prescott is currently the W. P. Carey Chair and professor of economics at Arizona State University’s W. P. Carey School of Business and a senior monetary advisor at the Minneapolis Federal Reserve Bank.
He becomes the first Nobel Laureate for Arizona State University and for Case’s Weatherhead School of Management. At Case, he joins a prestigious group of 14 scholars, researchers and innovators among its faculty and alumni, who have been honored with Nobel Laureates by the Royal Swedish Academy of Sciences.
“The driving forces behind business cycle fluctuations and the design of economic policy are key areas on macroeconomic research,” said the Royal Swedish Academy of Science in their announcement of the economic prize. “Finn Kydland and Edward Prescott have made fundamental contributions to these areas of great significance, not only for macroeconomic analysis, but also for the practice of monetary and fiscal policy in many countries.” Prescott has made major contributions to his field through more than 35 papers and nearly 50 published articles. He is the co-author of the recent book, Barriers to Riches, which examines the issue of accessibility to technology and the impact where barriers exist.
“Kydland and Prescott contribution help us better understand dynamic macroeconomics and the role economic policy can play in business cycles,” said Myron Roomkin, the incoming dean of the Weatherhead School of Management at Case. “Through the applications of precommitted rules and the avoidance of discretionary acts, government can create a stable and growing economy which clearly in the interest of business.”
“Edward Prescott is one of a small but influential band of economic theorists who were well grounded in operations research. They include Kenneth Arrow and Robert Merton who were Nobel laureates in 1972 and 1997,” said Matt Sobel, chair of Weatherhead’s department of operations.
Sobel also explained: From the 1960s, theorists realized that hypothetical decision makers would not perform at their best if they could make only short-run commitments. Late in the 1970s, Edward Prescott, together with co-laureate Finn Kydland, showed how this previously abstruse result explained observed performance of economies. Their findings affected business conditions in numerous developed economies, including the United States. There tended to be less political meddling with central bank policies than politicians had attempted in previous eras. So business conditions have been less volatile than if politicians had permitted central banks to implement only short-run plans.
Edward Prescott's research, even in the past decade, has complimented basic theory with the development of methods to compute the effects of alternative economic policies. That is, he has used his background in operations research as well as economics to contribute to the ability of economic policy makers to use their autonomy more effectively.
Kyland and Prescott, who will share the $1.4 million award, have jointly authored several articles and papers over the past two decades. “Their awarded work established the foundations for an extensive research program on the credibility and political feasibility of economic policy,” said the Nobel Prize committee.
The committee also said in their announcement that the Laureates “had transformed the theory of business cycles by integrating it with the theory of economic growth. 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.”
Among the Laureates’ collaborative works are “The computational experiment: an econometric tool” (1994), “The econometrics of the general equilibrium approach to business cycles” and “Business cycles: real facts and a monetary myth” (1990), “Hours and employment variation in business cycle theory” (1989) and “Time to Build and Aggregate Fluctuations” (1982). The “Time to Build and Aggregate Fluctuations” article is hailed as one of the most highly read journal articles in the past 30 years by “What You Should Know About Economics” Web site.
Both Prescott and Kydland earned their doctorate degrees from Carnegie Mellon University. Prescott received his undergraduate degree in mathematics from Swarthmore College.
The Nobel Prize for the 63-year-old Prescott is just one of many honors he has received throughout his career. He also has been the recipient of a Guggenheim Fellowship in 1974, a fellow of the Econometric Society in 1980 and the American Academy of Arts and Sciences in 1992. He was awarded the Erwin Plein Nemmers Prize in Economics and became an honorary economics laureate at the University of Rome in 2002.
The Nobel Prize in economic science—formally known as the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel—was established in 1968 by the Bank of Sweden and is the only the Nobel Award not stipulated in Alfred Nobel’s will in 1895.
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