Edward C. Prescott
Encyclopedia
Edward Christian Prescott (born December 26, 1940) is an American economist. He received the Nobel Memorial Prize in Economics in 2004, sharing the award with Finn E. Kydland
, "for their contributions to dynamic macroeconomics: the time consistency of economic policy and the driving forces behind business cycles". This research was primarily conducted while both Kydland and Prescott were affiliated with the Graduate School of Industrial Administration (now Tepper School of Business
) at Carnegie Mellon University
. According to the IDEAS/RePEc
rankings, he is the 11th most widely cited economist in the world today.
, to Mathilde Helwig Prescott and William Clyde Prescott. In 1962, he received his bachelor's degree
in mathematics from Swarthmore College
, where he was a member of the Delta Upsilon
fraternity. He then received a master's degree from Case Western Reserve University
in operations research
in 1963, and a PhD in Economics at Carnegie Mellon University
in 1967.
. He then returned to Carnegie Mellon until 1980, when he moved to the University of Minnesota
, where he taught until 2003. In 1978, he was a visiting professor at the University of Chicago
, where he was named a Ford Foundation Research Professor. In the following year, he visited Northwestern University
and stayed there until 1982. Since 2003, he has been teaching at Arizona State University
. In 2004, he held the Maxwell and Mary Pellish Chair in Economics at the University of California, Santa Barbara
. In 2006, he held the Shinsei Bank Visiting Professorship at New York University
.
The Research Papers in Economics
project ranked him as the 11th most influential economist in the world as of August 2011 based on his academic contributions. Currently working as an economist at the Federal Reserve Bank of Minneapolis
and as a professor at Arizona State University
's W.P. Carey School of Business, he is a major figure in macroeconomics
, especially the theories of business cycles and general equilibrium
. In his "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," published in 1977 with Finn E. Kydland
, he analyzed whether central banks should have strict numerical targets or be allowed to use their discretion in setting monetary policy
. He is also well known for his work on the Hodrick-Prescott Filter
, used to smooth fluctuations in a time series.
and policy makers
know the timing and magnitude of the effects of their actions… correct evaluation of the end-of-point position does not result in the social objective being maximized.” Prescott and Kyland were pointing out that agents in the economy already factor into their decision making the assumed response by policy makers to a given economic climate.
Additionally Prescott and Kydland felt that the policy makers due to their relationship with government suffered from a credibility issue. The reason for this dynamic is that the political process is designed to fix problems and benefit its citizens today. Prescott and Kydland demonstrated this with a simple yet convincing example. In this example they take an area that has been shown likely to flood (a flood plain) and the government has stated that the “socially optimal outcome” is to not have houses be built in that area and therefore the government states that it will not provide flood protection (dams, levees, and flood insurance) rational agents will not live in that area. However, rational agents are forward planning creatures and know that if they and other build
houses in the flood plain the government which makes decisions based on current situations will then provide flood protection in the future. While Prescott never uses these words he is describing a moral hazard.
The second paper, written in 1982, "Time to Build and Aggregate Fluctuations" Prescott and Kyland argued that shifts in supply typically caused by changes and improvements in technology accounted “Not only long term increases in living standards but also to many of the short term fluctuations in business cycles.” To study this hypothesis Prescott established a model to study the change in output, investment, consumption, labor productivity, and employment, between the end of the Second World War and 1980. Using this model the two economists were able to correlate 70% of the fluctuation in output to changes and growth in technology.
).
In January 2009 Prescott, along with more than 250 other economists and professors, signed an open letter to President Barack Obama opposing the passage of the American Recovery and Reinvestment Act. The letter was sponsored by libertarian think tank, the Cato Institute
, and was printed in several newspapers including the New York Times and the Arizona Republic.
His writings more recently have focused on the negative effect of taxes on the economy in Europe.
Finn E. Kydland
Finn Erling Kydland is a Norwegian economist. He is currently the Henley Professor of Economics at the University of California, Santa Barbara. He also holds the Richard P...
, "for their contributions to dynamic macroeconomics: the time consistency of economic policy and the driving forces behind business cycles". This research was primarily conducted while both Kydland and Prescott were affiliated with the Graduate School of Industrial Administration (now Tepper School of Business
Tepper School of Business
The Tepper School of Business is a private business school located on Carnegie Mellon University’s campus in Pittsburgh, Pennsylvania, USA.The school consistently ranks highly among the top business schools in the U.S., as well as in a wide range of specializations, such as finance,...
) at Carnegie Mellon University
Carnegie Mellon University
Carnegie Mellon University is a private research university in Pittsburgh, Pennsylvania, United States....
. According to the IDEAS/RePEc
Research Papers in Economics
Research Papers in Economics is a collaborative effort of hundreds of volunteers in 57 countries to enhance the dissemination of research in economics. The heart of the project is a decentralized database of working papers, preprints, journal articles and software components. The project started...
rankings, he is the 11th most widely cited economist in the world today.
Early life
Prescott was born in Glens Falls, New YorkGlens Falls, New York
Glens Falls is a city in Warren County, New York, United States. Glens Falls Metropolitan Statistical Area. The population was 14,700 at the 2010 census...
, to Mathilde Helwig Prescott and William Clyde Prescott. In 1962, he received his bachelor's degree
Bachelor's degree
A bachelor's degree is usually an academic degree awarded for an undergraduate course or major that generally lasts for three or four years, but can range anywhere from two to six years depending on the region of the world...
in mathematics from Swarthmore College
Swarthmore College
Swarthmore College is a private, independent, liberal arts college in the United States with an enrollment of about 1,500 students. The college is located in the borough of Swarthmore, Pennsylvania, 11 miles southwest of Philadelphia....
, where he was a member of the Delta Upsilon
Delta Upsilon
Delta Upsilon is the sixth oldest international, all-male, college Greek-letter organization, and is the oldest non-secret fraternity in North America...
fraternity. He then received a master's degree from Case Western Reserve University
Case Western Reserve University
Case Western Reserve University is a private research university located in Cleveland, Ohio, USA...
in operations research
Operations research
Operations research is an interdisciplinary mathematical science that focuses on the effective use of technology by organizations...
in 1963, and a PhD in Economics at Carnegie Mellon University
Carnegie Mellon University
Carnegie Mellon University is a private research university in Pittsburgh, Pennsylvania, United States....
in 1967.
Academic career
From 1966 to 1971, Prescott taught at the University of PennsylvaniaUniversity of Pennsylvania
The University of Pennsylvania is a private, Ivy League university located in Philadelphia, Pennsylvania, United States. Penn is the fourth-oldest institution of higher education in the United States,Penn is the fourth-oldest using the founding dates claimed by each institution...
. He then returned to Carnegie Mellon until 1980, when he moved to the University of Minnesota
University of Minnesota
The University of Minnesota, Twin Cities is a public research university located in Minneapolis and St. Paul, Minnesota, United States. It is the oldest and largest part of the University of Minnesota system and has the fourth-largest main campus student body in the United States, with 52,557...
, where he taught until 2003. In 1978, he was a visiting professor at the University of Chicago
University of Chicago
The University of Chicago is a private research university in Chicago, Illinois, USA. It was founded by the American Baptist Education Society with a donation from oil magnate and philanthropist John D. Rockefeller and incorporated in 1890...
, where he was named a Ford Foundation Research Professor. In the following year, he visited Northwestern University
Northwestern University
Northwestern University is a private research university in Evanston and Chicago, Illinois, USA. Northwestern has eleven undergraduate, graduate, and professional schools offering 124 undergraduate degrees and 145 graduate and professional degrees....
and stayed there until 1982. Since 2003, he has been teaching at Arizona State University
Arizona State University
Arizona State University is a public research university located in the Phoenix Metropolitan Area of the State of Arizona...
. In 2004, he held the Maxwell and Mary Pellish Chair in Economics at the University of California, Santa Barbara
University of California, Santa Barbara
The University of California, Santa Barbara, commonly known as UCSB or UC Santa Barbara, is a public research university and one of the 10 general campuses of the University of California system. The main campus is located on a site in Goleta, California, from Santa Barbara and northwest of Los...
. In 2006, he held the Shinsei Bank Visiting Professorship at New York University
New York University
New York University is a private, nonsectarian research university based in New York City. NYU's main campus is situated in the Greenwich Village section of Manhattan...
.
The Research Papers in Economics
Research Papers in Economics
Research Papers in Economics is a collaborative effort of hundreds of volunteers in 57 countries to enhance the dissemination of research in economics. The heart of the project is a decentralized database of working papers, preprints, journal articles and software components. The project started...
project ranked him as the 11th most influential economist in the world as of August 2011 based on his academic contributions. Currently working as an economist at the Federal Reserve Bank of Minneapolis
Federal Reserve Bank of Minneapolis
The Federal Reserve Bank of Minneapolis, located in Minneapolis, Minnesota, in the United States, covers the 9th District of the Federal Reserve, including Minnesota, Montana, North and South Dakota, northwestern Wisconsin, and the Upper Peninsula of Michigan...
and as a professor at Arizona State University
Arizona State University
Arizona State University is a public research university located in the Phoenix Metropolitan Area of the State of Arizona...
's W.P. Carey School of Business, he is a major figure in macroeconomics
Macroeconomics
Macroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of the whole economy. This includes a national, regional, or global economy...
, especially the theories of business cycles and general equilibrium
General equilibrium
General equilibrium theory is a branch of theoretical economics. It seeks to explain the behavior of supply, demand and prices in a whole economy with several or many interacting markets, by seeking to prove that a set of prices exists that will result in an overall equilibrium, hence general...
. In his "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," published in 1977 with Finn E. Kydland
Finn E. Kydland
Finn Erling Kydland is a Norwegian economist. He is currently the Henley Professor of Economics at the University of California, Santa Barbara. He also holds the Richard P...
, he analyzed whether central banks should have strict numerical targets or be allowed to use their discretion in setting monetary policy
Monetary policy
Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment...
. He is also well known for his work on the Hodrick-Prescott Filter
Hodrick-Prescott filter
The Hodrick–Prescott filter is a mathematical tool used in macroeconomics, especially in real business cycle theory to separate the cyclical component of a time series from raw data. It is used to obtain a smoothed-curve representation of a time series, one that is more sensitive to long-term than...
, used to smooth fluctuations in a time series.
Nobel Prize
Edward Prescott and Finn Kydland Nobel prize for economics was based on two papers Prescott and Kyland wrote. In the first paper, written in 1977 "Rules Rather than Discretion: : The inconsistency of optimal planning" Prescott and Kydland argue that purpose and goals of economic planning and policy is to trigger a desired response from the economy. However, Prescott and Kydland realized that these sectors are made up of individuals, individuals who make assumptions and predictions about the future. As Prescott and Kydland stated “Even if there is a fixed and agreed upon social objective functionSocial welfare function
In economics, a social welfare function is a real-valued function that ranks conceivable social states from lowest to highest. Inputs of the function include any variables considered to affect the economic welfare of a society...
and policy makers
Policy
A policy is typically described as a principle or rule to guide decisions and achieve rational outcome. The term is not normally used to denote what is actually done, this is normally referred to as either procedure or protocol...
know the timing and magnitude of the effects of their actions… correct evaluation of the end-of-point position does not result in the social objective being maximized.” Prescott and Kyland were pointing out that agents in the economy already factor into their decision making the assumed response by policy makers to a given economic climate.
Additionally Prescott and Kydland felt that the policy makers due to their relationship with government suffered from a credibility issue. The reason for this dynamic is that the political process is designed to fix problems and benefit its citizens today. Prescott and Kydland demonstrated this with a simple yet convincing example. In this example they take an area that has been shown likely to flood (a flood plain) and the government has stated that the “socially optimal outcome” is to not have houses be built in that area and therefore the government states that it will not provide flood protection (dams, levees, and flood insurance) rational agents will not live in that area. However, rational agents are forward planning creatures and know that if they and other build
houses in the flood plain the government which makes decisions based on current situations will then provide flood protection in the future. While Prescott never uses these words he is describing a moral hazard.
The second paper, written in 1982, "Time to Build and Aggregate Fluctuations" Prescott and Kyland argued that shifts in supply typically caused by changes and improvements in technology accounted “Not only long term increases in living standards but also to many of the short term fluctuations in business cycles.” To study this hypothesis Prescott established a model to study the change in output, investment, consumption, labor productivity, and employment, between the end of the Second World War and 1980. Using this model the two economists were able to correlate 70% of the fluctuation in output to changes and growth in technology.
Political activity
Edward Prescott is one of the "100 Economists" (actually 90 in number, although additional economists signed the statement after it was released by the McCain campaignJohn McCain presidential campaign, 2008
John McCain, the senior United States Senator from Arizona, launched his second candidacy for the presidency of the United States in an unsuccessful bid to win the 2008 presidential election. His candidacy, in the works for a number of years, was informally announced on February 28, 2007 during a...
).
In January 2009 Prescott, along with more than 250 other economists and professors, signed an open letter to President Barack Obama opposing the passage of the American Recovery and Reinvestment Act. The letter was sponsored by libertarian think tank, the Cato Institute
Cato Institute
The Cato Institute is a libertarian think tank headquartered in Washington, D.C. It was founded in 1977 by Edward H. Crane, who remains president and CEO, and Charles Koch, chairman of the board and chief executive officer of the conglomerate Koch Industries, Inc., the largest privately held...
, and was printed in several newspapers including the New York Times and the Arizona Republic.
His writings more recently have focused on the negative effect of taxes on the economy in Europe.
Honours and awards
- United States National Academy of SciencesUnited States National Academy of SciencesThe National Academy of Sciences is a corporation in the United States whose members serve pro bono as "advisers to the nation on science, engineering, and medicine." As a national academy, new members of the organization are elected annually by current members, based on their distinguished and...
(2008) - Nobel Memorial Prize in Economic SciencesNobel Memorial Prize in Economic SciencesThe Nobel Memorial Prize in Economic Sciences, commonly referred to as the Nobel Prize in Economics, but officially the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel , is an award for outstanding contributions to the field of economics, generally regarded as one of the...
(2004) - Erwin Plein Nemmers Prize in EconomicsErwin Plein Nemmers Prize in EconomicsThe Erwin Plein Nemmers Prize in Economics is awarded biennially from Northwestern University. It was initially endowed along with a companion prize, the Frederic Esser Nemmers Prize in Mathematics. Both are part a $14 million donation from the Nemmers brothers, who envisioned creating an award...
, Northwestern University (2002) - Fellow, American Academy of Arts and SciencesAmerican Academy of Arts and SciencesThe American Academy of Arts and Sciences is an independent policy research center that conducts multidisciplinary studies of complex and emerging problems. The Academy’s elected members are leaders in the academic disciplines, the arts, business, and public affairs.James Bowdoin, John Adams, and...
(1992) - Fellow, Econometric Society (1980)
- Alexander Henderson AwardAlexander Henderson AwardThe Alexander Henderson Award is presented to the student at the Tepper School of Business at Carnegie Mellon University who displays the best work in the field of economic theory. A large proportion of the winners of the award has later made contributions to economics that have changed the...
, Carnegie Mellon (1967)
Further reading
- Kehoe, T. J.Timothy J. KehoeTimothy Jerome "Tim" Kehoe is a renowned American economist and professor at the University of Minnesota. His area of specialty is macroeconomics and international economics....
, and E. C. Prescott, editors, Great Depressions of the Twentieth Century, Federal Reserve Bank of Minneapolis, 2007.