STOCKHOLM (AFP) - Norwegian Finn Kydland and Edward Prescott of the United States won the 2004 Nobel Economics Prize for business cycle research that has helped reform monetary policy in numerous countries.
"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," the Nobel jury said Monday.
Earlier economic research tended to regard macroeconomic fluctuations as primarily due to demand. But these theories failed to explain why Western societies became characterized by stagflation, a condition of concurrent unemployment and inflation.
Kydland and Prescott showed in two papers published in 1977 and in 1982 that when economic policymakers who advocate low inflation cannot commit to a policy, their action often inadvertently causes high inflation.
The pair called this "the time consistency problem", pointing out that policy proposals regarded as the best way to lower inflation often will not be implemented later.
When governments fail to carry out stated low-inflation objectives, their policies lose credibility, resulting in "high and self-fulfilling inflationary expectations".
"A lot of people make decisions based on what they think the government is going to do in the future... so it's important for a government to follow the rules so people can have faith in them," Kydland told Norwegian public radio NRK after learning that he had won the Nobel Economics Prize.
"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.
Kydland, who is the third Norwegian to win the prestigious prize, is a professor of economics at Carnegie Mellon University in Pittsburgh, Pennsylvania, in the US, 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 included in the last will and testament of the creator of the awards, Swedish inventor Alfred Nobel.
The economics award 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 work in explaining quarks, nature's tiniest building blocks, while US research duo Richard Axel and Linda Buck won the Medicine Prize for their research on the sense of smell in mammals.
Along with the other Nobel laureates, Kydland and Prescott will receive their prize from Sweden's King Carl XVI Gustaf at the official ceremony in Stockholm on December 10, the anniversary of Nobel's death in 1896.