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Norwegian, American win economics prize
Updated: 2004-10-11 20:41

Norwegian Finn Kydland and Edward Prescott of the United States won the Nobel economics prize for 2004 on Monday for analyzing how economic policy is shaped and what drives business cycles.

Finn Kydland(L) & Edward Prescott [Reuters] 
"Their work has not only transformed economic research, but has also profoundly influenced the practice of economic policy in general, and monetary policy in particular," the Royal Swedish Academy of Sciences said in its citation.

Their research has "transformed the theory of business cycles by integrating it with the theory of economic growth."

Kydland, who teaches at Carnegie Mellon University and the University of California, and Prescott, who works at Arizona State University and the Federal Reserve Bank of Minneapolis, share the 10 million Swedish crown ($1.36 million) prize.

Their 1977 research on the "time consistency problem" described how policy makers often have an effect opposite to that intended because they lack consistency -- for example, setting out to keep prices stable but in fact creating inflation.

Their work helped shift the focus in policy-making to institutions rather than isolated measures.

In 1982 they created a model which showed that supply-side shocks -- such as technology -- 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.

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