Edward Prescott was born in Glens Falls, New York, USA in 1940. He graduated from Swarthmore College in 1962 with a BA in mathematics, and was awarded an MS in operations research by the Case Institute of Technology (now Case-Western Reserve University) in 1963. He then attended Carnegie-Mellon University and was awarded a PhD in economics in 1967.
Prescott’s academic career began in 1966 when he was appointed lecturer in the Department of Economics at the University of Pennsylvania. He was promoted to assistant professor in 1967. Prescott moved back to Carnegie-Mellon in 1971 as Assistant Professor of Economics, becoming Associate Professor of Economics in 1972, and Professor of Economics in 1975. He spent 1974–75 as Visiting Professor of Economics at the Norwegian School of Economics and Business Administration in Bergen, where he worked with his fellow Laureate Finn Kydland on the first of the two papers that would later win them the Nobel Prize: ‘Rules Rather Than Discretion: The Inconsistency of Optimal Plans’, published in 1977 in the Journal of Political Economy. In 1980 Prescott left Carnegie-Mellon to take up a professorial post at the University of Minnesota. He moved to the University of Chicago as Professor of Economics in 1998 but returned to Minnesota the following year. In 2003 he took up his present post as W.P. Carey Chair of Economics at Arizona State University. Prescott has also held visiting professorial positions at the University of Chicago (1978–79) and Northwestern University (1979–80 and 1980–82).
Prescott’s professional affiliations include the posts of senior advisor (1980–2003) and senior monetary advisor (since 2003) at the Federal Reserve Bank of Minneapolis, and he has been a research associate of the National Bureau of Economic Research since 1988. Prescott was president of the Society of Economic Dynamics and Control from 1992 to 1995, and president of the Society for the Advancement of Economic Theory from 1992 to 1994.
Prescott’s awards and honours include fellowships of the Econometric Society (1980) and the American Academy of Arts and Sciences (1992). He was a Brookings Economic Policy Fellow in 1969–70, and a Guggenheim Fellow in 1974–75. In 2004, Edward Prescott and Finn Kydland were jointly awarded the Nobel Memorial Prize in Economics ‘for their contributions to dynamic macroeconomics: the time consistency of economic policy and the driving forces behind business cycles’ (Nobel Foundation, 2004).
In the preceding entry in this volume – for Finn Kydland – we reviewed the nature and significance of the two strands of work for which Prescott and Kydland have been jointly honoured by the Royal Swedish Academy of Sciences. Rather than cover the same ground in the present entry, we shall instead briefly discuss some of the constructions placed on this analysis by Prescott (1986); we conclude with some references to Prescott’s more recent work.
A notable implication of Kydland and Prescott’s 1982 Econometrica paper, ‘Time to Build and Aggregate Fluctuations’, the second of the two papers cited in their Nobel award, concerns the conceptual significance of business cycles: are they independent phenomena distinct from the long-run growth process as economists for a long time believed? Prescott (1986) argues that they are not. His and Kydland’s pioneering research provided an integrated approach to understanding growth and cyclical fluctuations and demonstrated that large movements in output and employment over relatively short time periods are what standard neoclassical theory predicts. Indeed, it ‘would be puzzling if the economy did not display these large fluctuations in output and employment’ (Prescott, 1986, p. 9). In Prescott’s view there is a message here for economic policy. He considers business cycles or economic fluctuations to be ‘optimal responses to uncertainty in the rate of technological change’ (Prescott, 1986, p. 21); they should not be construed as forms of aberrant behaviour in need of correction by government. This argument is consistent with the main finding of Kydland and Prescott’s other Nobel cited paper (Kydland and Prescott, 1977), that optimal control theory and discretionary policy should be abandoned in favour of a rules-based approach to macroeconomic governance.
Other notable work by Prescott with Kydland includes further research on business cycles and a methodological discussion (Kydland and Prescott, 1991a; 1991b; 1996). With Robert Lucas (see entry in this volume) he has produced important papers on investment and unemployment (Lucas and Prescott, 1971; 1974). With Ellen McGratten he has considered issues around the valuation of the US and UK stock markets (McGratten and Prescott, 2000a); with Fumio Hayashi he has explored the reasons behind the poor performance of the Japanese economy in the 1990s (Hayashi and Prescott, 2002a); and he has reflected more generally on depressions (Prescott, 2002b). Finally, with Stephen Parente, Prescott has written a book explaining the obstacles to economic development that confront the world’s poorer economies (Parente and Prescott, 2000b).
Main Published Works
(1971), ‘Investment Under Uncertainty’ (with R.E. Lucas), Econometrica, 39, September, pp. 659–81.
(1974), ‘Equilibrium Search and Unemployment’ (with R.E. Lucas), Journal of Economic Theory, 7, February, pp. 188–209.
(1977), ‘Rules Rather Than Discretion: The Inconsistency of Optimal Plans’ (with F.E. Kydland), Journal of Political Economy, 85, June, pp. 473–92.
(1982), ‘Time to Build and Aggregate Fluctuations’ (with F.E. Kydland), Econometrica, 50, November, pp. 1345–70.
(1986), ‘Theory Ahead of Business Cycle Measurement’, Federal Reserve Bank of Minneapolis Quarterly Review, 10, Fall, pp. 9–22.
(1991a), ‘Hours and Employment Variation in Business Cycle Theory’ (with F.E. Kydland), Economic Theory, 1, January, pp. 63–81.
(1991b), ‘The Econometrics of the General Equilibrium Approach to Business Cycles’ (with F.E. Kydland), Scandinavian Journal of Economics, 93 (2), pp. 161–78.
(1996), ‘The Computational Experiment: An Econometric Tool’ (with F.E. Kydland), Journal of Economic Perspectives, 10, Winter, pp. 69–85.
(2000a), ‘Is the Stock Market Overvalued?’ (with E.R. McGratten), Federal Reserve Bank of Minneapolis Quarterly Review, 24, Fall, pp. 20–40. (2000b), Barriers to Riches (with S.L. Parente), Cambridge, MA: MIT Press.
(2002a), ‘The 1990s in Japan: A Lost Decade’ (with F. Hayashi), Review of Economic Dynamics, 5, January, pp. 206–35.
(2002b), ‘Prosperity and Depressions’, American Economic Review, 92, September, pp. 1205– 17.
Royal Swedish Academy of Sciences (2004), ‘Finn Kydland and Edward Prescott’s Contribution to Dynamic Macroeconomics: The Time Consistency of Economic Policy and the Driving Forces Behind Business Cycles’, available from http://www.nobelprize.org.