Nobel prize goes to pair who championed inflation-targeting

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The Independent Online

Two economists whose work paved the way for success in the fight against inflation in Britain and other countries were rewarded with the Nobel prize yesterday.

Ed Prescott of the United States and Finn Kydland of Norway will receive the 10m Swedish kronor (£780,000) prize money, which they will share, for their "contributions to dynamic macroeconomics".

Their critique of governments' failure to tackle inflation in the 1960s and 1970s pointed towards setting long-term rules for governments and central banks that people would trust.

Their research shifted the debate away from one-off measures towards the wholesale reform necessary to ensure policy was credible and feasible.

The Royal Swedish Academy of Sciences said: "This work has had a far-reaching impact on reforms carried out in many places, such as Britain, New Zealand, Sweden and the euro area, aimed at legislated delegation of monetary policy decisions to independent central bankers of pre-specified price-stability objectives."

Britain adopted an inflation target in 1992 but in 1997 Gordon Brown, the incoming Chancellor, went further by handing the power to set interest rates to the Bank of England and setting a statutory inflation target.

Martin Weale, the director of the UK's National Institute for Economic and Social Research, said the award was "very well deserved". "It is fair to say that they drew attention to the fact that without some way of restricting them then policymakers, and particularly governments, would have incentives to promise one thing and deliver another," he said.

In other words while governments historically promised low inflation, the electoral cycle encouraged them to break their own promises for short-term gain. Mr Weale said: "Certainly the perception is that the institutional arrangements [in the UK] have done a job of keeping inflation down compared with the 1970s and 1980s."

The citation said the work of the two economists has transformed academic research in economics as well as the practice of macroeconomic analysis and policymaking analysis and policymaking.

However the two men are best known for a paper published in 1982 which established that business cycles stem from the economy's response to changes in investment and technological innovations that affect the economy's productivity.

Mr Prescott, 63, is a professor at Arizona State University and the senior monetary advisor for the Federal Reserve Bank of Minneapolis. Mr Kydland, 60, is a professor at the University of California and the Carnegie Mellon University in Pittsburgh.

Past awards of the prize - officially known as the Bank of Sweden Prize in economic sciences in memory of Alfred Nobel - have recognised research on topics ranging from poverty to how multinational corporations make profits.

Last year the prize was awarded in part to Clive Granger, who was born in Swansea and is a professor at a US university.