Kydland on his work and its impact

• Pages: 137-147

Page 137

Finn E. Kydland, together with Edward E. Prescott, received the 2004 Nobel Prize in economics for their studies on the forces behind business cycle fluctuations and the time consistency of economic policy.

In an interview, Kydland explains how his work has contributed to "dynamic macroeconomics," why economists should turn their attention to issues spanning life cycles, and why he is intrigued by diverse country studies such as those of Ireland and Argentina.

Page 146

Nobel laureate Kydland reflects, talks about what's in store

In 2004, the Nobel Committee awarded Finn E. Kydland and Edward E. Prescott the Nobel Prize in economics, citing their contribution to "dynamic macroeconomics: the time consistency of economic policy and the driving forces behind business cycles." Kydland, the Henley Professor of Economics at the University of California at Santa Barbara, was in Washington, D.C., recently to present a seminar at the IMF Institute. He spoke with Arvind Subramanian, Division Chief in the IMF's Research Department, about receiving the Nobel Prize and the implications of his work for the economics profession.

SUBRAMANIAN: What were you doing when the famous call came from the Nobel Committee?

KYDLAND: I was in Norway teaching dynamic macro at the basic MBA level. A secretary came in, saying that there was a call for me. I wanted to wait five minutes until the break, but she said, "No. No. They are quite insistent."

When I answered the phone, there was someone speaking to me in Swedish. The head of the Nobel Committee read what seemed to be a prepared statement and said, "Just so you don't think this is a joke, I have a couple of people here you know." He then put them on the line.

SUBRAMANIAN: There's no question that your work on credibility and commitment has made a huge contribution to economics.

But can credibility and commitment be overdone, as some say is the case with the European Union's Stability and Growth Pact? In practice, don't you need the right combination of flexibility and commitment?

KYDLAND: Well, there are two aspects. One is that whatever you commit to ought to be a good policy. It should not be commitment for its own sake, but commitment to something that benefits the people and the economy, and generates growth that is close to the highest possible rate. So, first, the choice of policy has to be wise, but then commitment is indeed...