Finn E. Kydland

2.1. Early Life and Education

Kydland was born on 1 December 1943, in Ålgård near Stavanger, in the municipality of Gjesdal, Rogaland county, southwestern Norway. He grew up as the eldest of six siblings on the family farm in Søyland, located in the Jæren farming region. He often recalled having a liberal upbringing, with his parents not imposing many limitations on their children. His early interest in mathematics and economics was sparked as a young adult after he gained experience in bookkeeping at a friend's mink farm.

Driven by a newly awakened interest in theoretical economics, Kydland pursued higher education. He earned a Bachelor of Science (BSc) degree from the Norwegian School of Economics (NHH) in 1968. He then moved to the United States to continue his studies, receiving his Doctor of Philosophy (PhD) in economics from Carnegie Mellon University in 1973. His doctoral dissertation was titled Decentralized Macroeconomic Planning, and it was supervised by the distinguished economists Edward C. Prescott and David Cass.

2.2. Early Career and Academic Beginnings

After completing his PhD, Kydland returned to his alma mater, the Norwegian School of Economics (NHH), where he began his academic career as an assistant professor in 1973. His tenure there lasted until 1978, when he moved back to Carnegie Mellon University as an associate professor. He has resided in the United States ever since, continuing his influential work in economics. This period marked the beginning of his significant contributions to economic research and teaching, laying the groundwork for his future theoretical breakthroughs.

3.1. Areas of Research and Expertise

Kydland's primary fields of study and teaching encompass economics in general and political economy. His main areas of interest include business cycles, monetary policy, fiscal policy, and labor economics. He is also known for his work on the Backus-Kehoe-Kydland puzzle, one of the international macroeconomic puzzles. His research consistently explores the dynamic interactions within economic systems and their implications for policy and societal welfare.

3.2. Real Business Cycle Theory

One of Kydland's most significant achievements is the co-development of the Real Business Cycle (RBC) theory, a seminal contribution to macroeconomics. This theory originated from his collaborative work with Edward C. Prescott, notably in their 1982 paper titled "Time to Build and Aggregate Fluctuations." The RBC theory is based on a one-sector optimal growth model and investigates how representative economic agents respond to real shocks that cause fluctuations in the economy.

Kydland and Prescott's work challenged prevailing views by emphasizing the importance of real factors over monetary ones in driving business cycles, asserting that economic fluctuations are an inherent and unavoidable aspect of market economies. This assertion, presented in a rather provocative manner, generated substantial debate. The calibration method, a numerical simulation technique employed by Kydland and Prescott, also faced initial opposition. However, by the early 1990s, similar methods began to be adopted even in Keynesian papers, demonstrating the growing acceptance and influence of their methodological innovations. While static economic analysis involves solving simultaneous equations to examine the behavior of solutions, dynamic analysis typically involves solving systems of differential equations, which often proves difficult to solve explicitly. In this context, the analytical approach of conducting simulations based on real-world data, as pioneered by Kydland and Prescott, has since gained a firm and respected position in economic research.

3.3. Time Consistency in Economic Policy

Kydland's foundational work also includes his insights into the time inconsistency of optimal economic policy, explored in his 1977 paper with Edward C. Prescott, "Rules rather than discretion: The inconsistency of optimal plans." This work highlights a critical challenge in long-term economic planning: a policy that is optimal at a given moment may no longer be optimal in the future, leading policymakers to deviate from previously announced plans. Such deviations can undermine the credibility of policy, making it difficult for economic agents to form stable expectations and for policies to achieve their intended long-term effects. Kydland's analysis underscores the importance of commitment mechanisms and policy rules to ensure consistency and enhance the effectiveness of economic policy, thereby fostering greater economic stability and predictability.

3.4. Key Publications

Kydland's theoretical contributions are documented in numerous influential academic papers and works:

• "Endogenous Money, Inflation, and Welfare," (with Espen Henriksen), Review of Economic Dynamics, April 2010.
• "Monetary Policy, Taxes, and the Business Cycle," (with William Gavin, M. Pakko), Journal of Monetary Economics 54(6), September 2007; 1587-1611.
• "The Welfare Cost of Inflation in the Presence of Inside Money," (with Scott Freeman, Espen Henriksen), in D.E. Altig & E. Nosal (eds.) Monetary Policy in Low-Inflation Economies, Cambridge University Press, 2006.
• "Quantitative Aggregate Theory," American Economic Review, 2006 (his Nobel Prize lecture).
• "Home Production Meets Time to Build," (with Paul Gomme, Peter Rupert), Journal of Political Economy, 2001.
• "Monetary Aggregate and Output," (with Scott Freeman), American Economic Review, 2000.
• "Endogenous Money Supply and the Business Cycle," (with William Gavin), Review of Economic Dynamics, 1999.
• "The Gold Standard as a Rule: An Essay in Exploration," (with M. Bordo), Explorations in Economic History, 1995.
• "Dynamics of the Trade Balance and the Terms of Trade: The J-Curve?," (with D. Backus, P. Kehoe), American Economic Review, 1994.
• "Intertemporal Preferences and Labor Supply," (with V. Hotz, G. Sedlacek), Econometrica, 1988.
• "Time to Build and Aggregate Fluctuations," (with E. Prescott), Econometrica 50, 1345-1371, 1982.
• "Rules rather than discretion: The inconsistency of optimal plans," (with E. Prescott), Journal of Political Economy, 85, 473-490, 1977.

4.1. University Appointments

Kydland has served as a professor at several prominent academic institutions:

• He is the Henley Professor of Economics at the University of California, Santa Barbara, a position he assumed in 2004. At this institution, he also founded the Laboratory for Aggregate Economics and Finance (LAEF).
• He holds the Richard P. Simmons Distinguished Professorship at the Tepper School of Business of Carnegie Mellon University, where he served as a professor of economics until 2004, having joined the faculty in 1977 as an associate professor.
• He maintains a part-time or adjunct professorship at the Norwegian School of Economics (NHH), where he began his academic career as an assistant professor in 1973.
• Kydland has also held visiting scholar and professor positions at other notable institutions, including the Hoover Institution and the Universidad Torcuato di Tella in Buenos Aires, Argentina.

4.2. Research and Advisory Positions

Beyond his direct university roles, Kydland has been actively involved in various research and advisory capacities:

• He serves as a Research Associate for the Federal Reserve Banks of Dallas, Cleveland, and St. Louis, contributing his expertise to central banking research.
• He is also a Fellow at the IC² Institute at the University of Texas at Austin, an interdisciplinary research unit focusing on the links between technology, entrepreneurship, and economic development.

5.1. Nobel Memorial Prize in Economic Sciences

In 2004, Finn E. Kydland was a co-recipient of the Nobel Memorial Prize in Economic Sciences (officially, "The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel"). He shared the award with Edward C. Prescott "for their contributions to dynamic macroeconomics: the time consistency of economic policy and the driving forces behind business cycles." His Nobel Prize lecture, delivered on December 8, 2004, was titled Quantitative Aggregate Theory.

5.2. Other Honors and Fellowships

In addition to the Nobel Prize, Kydland has received several other significant recognitions:

• He was made a Fellow of the Econometric Society in 1992, an honor that he continues to hold.
• He was awarded the John Stauffer National Fellowship at the Hoover Institution for the academic year 1982-1983.
• In 1973, he received the Alexander Henderson Award from Carnegie Mellon University, the same year he earned his PhD.
• Kydland is a Member of the Norwegian Academy of Science and Letters.
• In 2017, he received the International Chamber of Commerce Oslo Business for Peace Award, recognizing his contributions to economic understanding that foster stability and prosperity.

6.1. Family

Kydland married Liv Kjellevold in 1968. Together, they had four children: Jon Martin, Eirik, Camilla, and Kari. He is currently married to Tonya Schooler.

6.2. Hobbies and Interests

Kydland is known for his active lifestyle and appreciation for various forms of culture. He is an avid sports enthusiast, particularly enjoying soccer, which he frequently played and watched. He is a supporter of the Argentine club Boca Juniors. He has also participated in and completed marathon races. Outside of sports, Kydland has a deep interest in music, especially blues. He also has a fondness for motorcycles, owning a Ducati.

7.1. Influence on Economic Theory and Methodology

Kydland's theoretical frameworks and research methodologies, particularly those developed with Edward C. Prescott, have profoundly influenced subsequent academic discourse and modeling approaches in macroeconomics. The Real Business Cycle (RBC) theory, in particular, shifted the focus of business cycle analysis from predominantly monetary factors to real economic shocks, such as technological advancements and productivity changes. This reorientation encouraged economists to build dynamic, general equilibrium models that could explain observed macroeconomic fluctuations without relying heavily on nominal rigidities.

Furthermore, Kydland and Prescott's pioneering use of the "calibration" method-a numerical simulation technique-revolutionized the way economists test and validate their theoretical models. This approach, which involves parameterizing models with real-world data and then simulating their behavior to see if they match empirical regularities, provided a powerful alternative to traditional econometric estimation. Although initially met with skepticism, calibration has since become a standard tool in macroeconomics, enabling researchers to explore the implications of complex dynamic models that are otherwise intractable. Their work demonstrated the feasibility and utility of dynamic methods for analyzing economic systems, pushing the field towards more rigorous and computationally intensive approaches.

7.2. Impact on Economic Policy and Society

Kydland's research has significant implications for economic policy decisions and the understanding of business cycles, ultimately impacting society at large. His work on the time inconsistency of optimal economic policy highlighted a crucial dilemma for policymakers: what is optimal today might not be optimal tomorrow, creating incentives for governments to deviate from their announced plans. This insight underscored the importance of establishing credible and predictable policy rules rather than relying on discretionary actions. For society, this means that consistent and transparent policies, whether in monetary or fiscal domains, are more likely to foster long-term economic stability, encourage investment, and promote sustainable growth.

By providing a framework to understand how real shocks drive business cycles, Kydland's theories offer valuable insights for policymakers aiming to mitigate economic volatility. While RBC theory suggests that business cycles are a natural response to real economic changes, it also informs how governments might respond to these fluctuations, focusing on policies that enhance economic flexibility and resilience rather than attempting to fine-tune the economy with short-term interventions. This perspective emphasizes the importance of structural reforms and stable institutional frameworks that support productivity and innovation, which are crucial for long-term employment, improved living standards, and overall social welfare. His contributions have thus informed a more nuanced approach to macroeconomic policy, emphasizing the foundational elements necessary for equitable development and sustained prosperity.