Search Results

This chapter looks at the life of Edward C. Prescott who received a Nobel Prize in 2004. Prescott was born in 1940 and earned his Ph.D. at Carnegie Mellon University in 1967. He was a senior adviser at the Federal Reserve Bank of Minneapolis and later, chair and professor of economics at Arizona State University. Along with Robert Townsend, he extended the theory of valuation equilibrium to the study of environments. He also worked with Rogerson and Wallenius looking at differences in workweek lengths across different occupations. He and Finn Kydland focused on the business cycle using economic time series statistical properties. Prescott explained nationwide differences in actual working-hours, which he concluded were due to different tax rates. His success lay in his contribution to developing a methodology for the study of dynamic economic phenomena. His publications include Contractual Arrangements for Intertemporal Trade and Great Depressions of the Twentieth Century.

This chapter analyzes the issues of time consistency and credibility in fiscal and monetary policy making. It briefly describes the article by Finn Kydland and Edward Prescott which introduced the dynamic consistency problem. It provides a simple characterization of the dynamic consistency problem and then uses capital taxation as an example to demonstrate the issue of the dynamic consistency problem. It also studies how the problem of dynamic consistency can interfere with the design of monetary policy regarding inflationary bias, and provides possible solutions to these problems.

This chapter proposes a systematic way of examining the importance of the extensive and the intensive margins of labour supply in order to explain the overall movements in total hours of work over time. This analysis is applied to the evolution of labour practices in the USA, UK, and France, and shows that both the extensive and intensive margins matter in explaining changes in total hours. The chapter pays close attention to Edward Prescott’s article ‘Why Do Americans Work So Much More than Europeans?’, where he argues that the responsiveness of the extensive margin of labour supply to taxation plays a major role in explaining aggregate differences in total hours worked across countries. These differences show that an economy with fixed technology costs for firms and an inverted U-shape life cycle productivity for workers can produce large aggregate extensive labour supply responses driven by movements in employment at either end of the working life.