STOCKHOLM, Oct 11 (AFP) - Norwegian Finn Kydland and Edward Prescott of the United States on Monday won the 2004 Nobel Economics Prize for business cycle research that has helped reform monetary policy in numerous countries, the Nobel jury said.
"In a highly innovative way, the laureates have analyzed the design of economic policy and the driving forces behind business cycles. 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," it stated.
Earlier economic research tended to regard macroeconomic fluctuations as primarily due to the demand side. But these theories failed to explain why western societies have become characterized by stagflation, or concurrent unemployment and inflation.
Kydland and Prescott showed in two papers published in 1977 and in 1982 that economic policymakers who have said they are in favor of low inflation but who cannot commit to a rule in advance will often inadvertently conduct a policy that will cause high inflation.
The pair called this "the time consistency problem", pointing out that policy regarded as the best option to lower inflation in advance will often not be implemented later on when expectations and private behavior have already been shaped.
When governments fail to follow through on stated low inflation objectives, their policies lose credibility, resulting in "high and self-fulfilling inflationary expectations".
"This research shifted the practical discussion of economic policy away from isolated policy measures towards the institutions of policymaking, a shift that has largely influenced the reforms of central banks and the design of monetary policy in many countries over the last decade," the Nobel jury said, pointing out that the research has impacted reforms in many countries, including Britain, New Zealand, Sweden and in the entire eurozone.
Kidland is a professor of economics at Carnegie Mellon University in Pittsburgh, while Prescott is a professor at Arizona State University and a researcher at the Federal Reserve Bank of Minneapolis.
They will share the prize sum of 10 million kronor (1.1 million euros, 1.4 million dollars).
The Nobel Economics Prize, the last of the six coveted prizes to be awarded this year, is the only one not originally included in the last will and testament from the creator of the awards, Swedish inventor Alfred Nobel.
It was created by the Swedish Central Bank in commemoration of its tercentenary in 1968, and first awarded in 1969. It is also funded by the bank.
Last week, the Nobel Peace Prize was awarded to Kenyan ecologist Wangari Maathai for her campaign to save Africa's forests, while the Literature Prize went to Austrian writer Elfriede Jelinek, the author of "The Piano Teacher", which was made into an acclaimed film by Michael Haneke in 2001.
The Chemistry Prize went to Aaron Ciechanover and Avram Hershko of Israel and Irwin Rose of the United States for groundbreaking biochemistry work that has major implications for the treatment of serious illnesses, especially cancer.
US scientists David Gross, David Politzer and Frank Wilczek won the Physics Prize for pioneering work in explaining quarks, nature's tiniest building blocks, while US research duo Richard Axel and Linda Buck won the Medicine Prize for their pioneering work on mammals' sense of smell.
Along with the other Nobel laureates, Kydland and Prescott will receive their prize from the hands of Sweden's King Carl XVI Gustaf at the official ceremony in Stockholm on December 10, the anniversary of the death in 1896 of Alfred Nobel.