Finn E. Kydland

Finn E. Kydland is a Norwegian economist whose work on business cycles and economic-policy credibility reshaped modern macroeconomics. He shared the 2004 Nobel Memorial Prize in Economic Sciences with Edward C. Prescott.

Time inconsistency: A policy plan is time-inconsistent when the best future action differs from what was optimal when the plan was made. Kydland and Prescott showed why discretionary policymakers may abandon previously announced plans.
Rules versus discretion: A debate over whether policymakers should follow preannounced rules or retain case-by-case flexibility. Kydland and Prescott argued that discretion can undermine policy credibility and produce worse outcomes.
Edward C. Prescott: An American economist whose research with Finn E. Kydland transformed macroeconomics and earned the 2004 Nobel Memorial Prize. Prescott was Kydland’s collaborator on the work recognized by the Nobel Prize.
Central bank independence: An institutional arrangement that gives a central bank operational freedom from direct political control. Independence is one response to the credibility problems identified by time-inconsistency theory.
Rational expectations: An economic theory in which people use available information and their understanding of the economy when forming expectations. Their policy analysis assumes that people anticipate how incentives alter government choices.
Lucas critique: The claim that policy changes alter expectations, making historical relationships unreliable for forecasting policy effects. It shares the premise that people adjust behavior when policy rules change.
Time to Build: A 1982 paper by Finn E. Kydland and Edward C. Prescott that introduced investment delays into a real business-cycle model. This paper established a foundational modeling approach for their account of economic fluctuations.
Inflation bias: The tendency for discretionary monetary policy to produce inflation above the level implied by credible policy commitments. Kydland and Prescott’s framework helps explain this cost of discretionary policy.
Dynamic programming: A method for solving sequential decision problems by relating choices across time. Kydland’s work challenged standard dynamic optimization when plans cannot be credibly committed.
Technology shock: An unexpected change in productive technology that affects how much an economy can produce. In Kydland and Prescott’s business-cycle model, technology shocks generate economic fluctuations.

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