Hot on the heels of a Nobel Prize in physics last week, UCSB announced more great news: Finn Kydland, a recent hire, has won his own Nobel in economics.

Kydland, a professor who is also on the faculty of Carnegie Mellon University, shares the prize with Edward Prescott, a professor at Arizona State University who spent one academic quarter in 2004 as a visiting professor at UCSB.

The two economists won the prize for work they published in 1977 and 1982 on the topic of macroeconomics, or the study of large-scale economic events, as opposed to microeconomics, which deals with individual consumers and producers.

Specifically, Kydland and Prescott "analyzed the design of economic policy and the driving forces behind business cycles," according to the Royal Swedish Academy of Sciences’s announcement of the prize.

The Academy wrote that these are key areas in macroeconomic research, and that their work "has initiated a research program that has profoundly influenced the practice of policy design."

According to the Academy, the economists wrote that economic policymakers pick policies in advance that they see as the best options for the future, and households and firms behave accordingly, but that these policies are often not implemented later on. Policymakers revise their policies as a result, and end up with weaker policies.

For example, if a government announces that it will pursue low inflation and people and businesses plan accordingly, but the government then decides in retrospect that more inflation would have reduced unemployment, and lowers interest rates accordingly, the result may be that inflation goes and stays up while unemployment is not affected. And if wage-earners and employers understand the policymakers’ motives, the announcement won’t be credible, and people will expect inflation; this expectation will be self-fulfilling, and wages will increase enough that unemployment will not decline.

The phone call informing Kydland of his prize interrupted him in the middle of a lecture in his home country, Norway.

Because he was still in Norway, Kydland participated by telephone in a press conference Tuesday morning at the university’s Faculty Club.

When asked what impact his work had had on banks and policies, Kydland replied, "You can’t ask a Norwegian that question. We’re way too bashful."

The Academy’s statement said that "the time-consistency problem has become a standard ingredient in subsequent research on economic policy," though.

The statement said that "[Kydland and Prescott’s] work has not only transformed economic research, but has also profoundly influenced the practice of economic policy in general, and monetary policy in particular."

As for future research, Kydland said, "I continually look for interesting questions to address. ... I am not wed to a particular approach or type of question."

He is pursuing three or four projects, he said. In particular, he said, he is interested in the policies of several countries. Argentina, he said, is widely viewed to have experienced "tremendous" growth in the 1990s after a depression and inflation in the 1980s; however, he said, it now looks like growth should have been higher.

Kydland is the Henley Professor at the UCSB economics department. Jeff Henley, the chairman of the board of Oracle Corporation and a resident of Santa Barbara, agreed to endow the chair a few years ago; it took the school until now to find the ideal candidate.

Henley said he was excited when Kydland came to the school in July.

"I didn’t think we were necessarily going to get a Nobel Prize, but I knew we were going to get a great person," Henley told the Voice after the conference. "The Nobel Prize validates that he is a prominent economist."

Kydland’s enthusiasm for teaching also inspired Henley, who said he became excited about economics while an undergraduate at UCSB. Kydland is not teaching at UCSB yet, but will teach Economics 101, an intermediate class, to a lecture hall full of undergraduates starting in January.

Someone said the class would have 400 students. "That’s more than I had thought," said Kydland.

At the end of the teleconference, just before noon — 9 p.m. Central European Summer Time — Chancellor Henry Yang thanked Kydland and allowed him to get back to his dinner, which he had been having late for a couple of nights.

"I think it’s rather civilized to eat dinner late," replied Kydland, who was met with laughter from the assembled journalists and university personnel. "I wish some of the restaurants in Santa Barbara would [agree and stay open late]."

Photo credit: Reuters