图为：普雷斯科特教授在其博客上签名留念

Editor's Note: This essay is redacted from Prescott's 2004 Nobel Prize Address in Economics, delivered at Stockholm University in December 2004. Prescott was a co-recipient of the prize, along with Finn E. Kydland of Carnegie Mellon University in Pittsburgh and the University of California, Santa Barbara. They were awarded ”for their contributions to dynamic macroeconomics: the time consistency of economic policy and the driving forces behind business cycles.” A more complete paper based on Prescott's address is forthcoming in the Journal of Political Economy and on the Nobel Prize Committee's Web site.

What I am going to describe for you is a revolution in macroeconomics,
a transformation in methodology that has reshaped how we conduct our science.

Prior to the transformation, macroeconomics was largely separate from the rest of economics. Indeed, some considered the study of macroeconomics fundamentally different and thought there was no hope of integrating macroeconomics with the rest of economics, that is, with neoclassical economics. Others held the view that neoclassical foundations for the empirically determined macro relations would, in time, be developed. Neither view proved correct.

Finn E. Kydland and I have been lucky to be a part of this revolution, and my address will focus heavily on our role in advancing this transformation. Now, all stories about transformation have three essential parts: the time prior to the key change, the transformative era, and the new period that has been impacted by the change. And that is the story I am going to tell: how macroeconomic policy and research evolved from a system of equations to an investigation of dynamic stochastic economies. In other words, this is a story about how the macroeconomy finally came alive for macroeconomists.

Before proceeding, I want to emphasize that the methodology that transformed macroeconomics, which used to be the study of business cycle fluctuations, is applicable to the study of virtually all fields of economics. In fact, the meaning of the word macroeconomics has changed to refer to the tools being used rather than to the study of business cycle fluctuations.

These are exciting times in macroeconomics. The methodology that Finn Kydland and I developed for the study of business cycle fluctuations is being used to advance learning not only in the area of business cycles, but also in virtually all areas of economics. By using this methodology, researchers are able to apply theory and measurement to answer questions, define puzzles, and determine where better measurement is needed before specific questions can be answered.

For example, over the past five years I have been addressing the following questions using this methodology:

• What is the fundamental value of the stock market, and do fundamentals account for the large movements in the value of the stock market?
  
  
• Why did hours worked per adult fall by one-third in Western Europe, and not in Canada and the United States, in the 1970-1995 period?
  
  
• Why were market hours in the United States at the end of the 1990s 5 percent above what theory predicts?
  
  
• Why did Japan lose a decade of growth beginning in 1992, a decade when growth was at trend in the other advanced industrial countries?

Much of this recent research originates from my undergraduate teaching that began in the late 1990s. Until then, I had never taught a course in which economic questions were addressed using this methodology. The undergraduate course I taught was Quantitative Analysis of the Macroeconomy. I chose to teach this course because I felt there was a need to develop material that could be used in teaching what macroeconomics has become at the undergraduate level. I felt there was a need because Finn's and my work on the time consistency problem and developments in agency theory led me to the conclusion that having good macroeconomic policy requires having an educated citizenry that can evaluate macroeconomic policy. Macroeconomic policy is too important to be left to those who claim expertise in the subject.

Macroeconomics has progressed beyond the stage of searching for a theory to the stage of deriving the implications of theory. In this way, macroeconomics has become like the natural sciences. Unlike the natural sciences, though, macroeconomics involves people making decisions based upon what they think will happen, and what will happen depends upon what decisions they make. This means that the concept of equilibrium must be dynamic, and—as we shall see—this dynamism is at the core of modern macroeconomics.

The Transformation of Macroeconomic Policy

Before the transformation of macroeconomic policy, what was evaluated was a policy action given the current situation. Economists were busy trying to understand the determinants of output at a particular point in time; if they could discern those factors, they could suggest a policy to tweak the economy and to attain the desired output and thus tame the business cycle. After the transformation of macroeconomic policy, economists now consider the whole structure of business cycles and their many characteristics, and rather than an action, what is evaluated is a policy rule.

However, it turns out that there is no best policy rule. I will have more to say about this seeming incongruity in a moment. For now, let me note that any policy rule that is best, given that it will be followed in the future, is by definition time consistent, but—except in empirically uninteresting cases—time consistent rules are not optimal. Why? As we shall see, following a rule that makes sense in the short run (time consistency) may have deleterious long-run effects. This puts a premium on following good rules. All that can be hoped for is to follow a good rule, and this requires institutions that sustain this rule.

Macroeconomic Models Before the Transformation
Macroeconomic models were systems of equations that determined current outcomes given the values of the current policy actions, values of predetermined variables, and values of any stochastic shocks. Thus, physical models and pretransformation macro models have the same mathematical structure. With the system-of-equations approach, each equation in the system was determined up to a set of parameters. In the simple prototype macroeconometric model, there were a consumption function, an investment equation, a money demand function, and a Phillips curve. Behind all these equations were a rich empirical literature and, in the case of the consumption function, money demand function, and investment equation, some serious theoretical work. These models were notable in that they ignored the decision as to how much time to allocate to the market. The final step was to use the tools of statistical estimation theory to select the parameters.

I worked in this tradition. In my dissertation, I formulated the optimal policy selection problem as a Bayesian sequential decision problem (which, simply described, is a mathematical means of dealing with uncertainty in dynamic decision-making situations). This type of work was expected of a young scholar if he hoped to be taken seriously. Macroeconometric models organized the field, and success in macroeconomics was to have your equation incorporated into one of these models. Indeed, Robert E. Lucas Jr. and I were searching for a better investment equation in 1969 when we wrote our paper “Investment Under Uncertainty” (1971).

A key assumption in the system-of-equations approach is that the equations are policy invariant. As Lucas (1976) points out in his critique, which was presented in 1973, this assumption is inconsistent with dynamic economic theory. His insight made it clear that there was no hope for the neoclassical synthesis—that is, the development of neoclassical underpinnings of the system-of-equations macro models.

Fortunately, with the development of dynamic economic theory, the language of general equilibrium theory, and recursive methods, an alternative set of tractable macro models was developed for drawing scientific inference.

Macroeconomic Models After the Transformation
Models after the transformation are dynamic, fully articulated model economies in the general equilibrium sense of the word economy. Model people maximize utility given the price system, policy, and their consumption possibility set; firms maximize profits given their technology set, the price system, and policy; and markets clear. The key assumption is that preferences and technology are invariant to policy. They are the data of the theory and not the equations as in the system-of-equations approach. To repeat, with the general equilibrium approach, empirical knowledge is organized around preferences and technology, not around some set of equations.

The Time Inconsistency of Optimal Policy
Before the transformation, optimal policy selection was a matter of solving what the physical scientists called a control problem. This is not surprising, given that the system-of-equations approach was borrowed from the physical sciences. With such systems, the principle of optimality holds—that is, it is best to choose at each point in time what is best given the current situation and the rules by which policy will be selected in the future. The optimal policy is time consistent, and dynamic programming techniques can be used to find the optimal policy as in the physical sciences. This is true even if uncertainty exists.

However, Finn Kydland and I had read the Lucas critique and knew that for dynamic equilibrium models, only policy rules could be evaluated. This led us to search for a best rule to follow, where a rule is a function that specifies policy actions as a function of the state or position of the economy. We had worked on this problem before Finn left Carnegie Mellon to join the faculty of the Norwegian School of Business and Economics in 1973. In academic year 1974-1975, I visited the Norwegian School of Business and Economics, and in the spring of 1975, Finn and I returned to this problem. In previous research we had considered time consistent stationary policy rules. These rules have the property that they are a fixed point of the mapping that specifies the best rule today as a function of the rule that will be used in the future.

The fact that these rules were not optimal led us to our key insight: The best event-contingent policy plan is not time consistent. By this I mean that the continuation of a plan at some future point in the event-time tree is not optimal. This leads to the conclusion that there is value in being able to commit and that there are costs to having discretion. The only method of commitment is to follow rules. That is why we concluded that the time inconsistency of optimal plans necessitates following rules. Some societies have had considerable success in following good, but time inconsistent, policy rules. Other societies have had limited success in this regard and, as a result, their citizens suffer.

This need for rules in organizational settings has long been recognized. That is why all agree that rule by a good set of laws is desirable. This rule by law is a political institution to get around this time consistency problem. As we shall now see, what was new in our research was that this principle also holds for macroeconomic policy, which was counter to what most people thought at the time.

The Low Inflation Rule and an Independent Central Bank
A notable example of a success in following a good, but time inconsistent, rule is the one maintaining a low and stable inflation rate. Before describing an institution that is proving effective in getting commitment to this good rule in many countries, I will first describe why the price stability policy rule is time inconsistent.

In the economy considered, the nominal wage rate is set above the market-clearing level in some sectors, given the inflation rate specified by the rule. This outcome could be the result of industry insiders in each of a number of industries finding this rule optimal, given the wages chosen by the insiders in other industries and the expected inflation rate. If this rule is followed, ex post a distortion occurs that results in low employment. This distortion can be reduced by having inflation in excess of the amount specified by the rule. With the time consistent monetary policy rule, inflation will be at that level where the marginal value of higher inflation in reducing the distortion will just equal the marginal cost of the higher inflation. The equilibrium outcome is high inflation and no reduction in the distortion. Commitment to the best rule will not result in high inflation, just the labor market distortion.

I turn now to an institution that is proving successful in sustaining this rule. This institution is an independent central bank. Members of this organization have a vested interest in following this rule, for if it is not followed they would incur the risk that they would suffer in the future. If inflation has been excessive and a new administration is elected, top people in the organization will be replaced and the size of the central bank cut. Thus, members of this organization have a vested interest in the rule being followed.

The increased stability of the economy and the improved performance of the payments and credit system may be due, in part, to the diffusion of findings of Finn's and my “Rules Rather Than Discretion” paper. People now recognize much better the importance of having good macroeconomic institutions such as an independent central bank.

During the 1981 and current oil crises, for example, I was pleased that policies were not instituted that adversely affected the economy by reducing production efficiency. This is in sharp contrast to the oil crisis in 1974 when, rather than letting the economy respond optimally to a bad shock so as to minimize its cost, policies were instituted that adversely affected production efficiency and depressed the economy much more than it would otherwise have been.

Finn and I found that responses to both bad and good shocks are optimal and that attempts at stabilization policy are counterproductive. Now, when I say that responses to shocks are optimal, I am referring to market responses. What policy should focus on are the big things, such as what is a good tax system, what should be the level of government-provided services, and what policies are best given both positive and negative externalities.

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