The relationship between the driving force of the business cycle and the design of economic policies has always been an important field of macroeconomic research. Finn Kidland and Edward Prescott have made fundamental contributions to these important areas, not only for macroeconomic analysis, but also for the monetary and fiscal policy practices of many countries.
Traditional economic theory: Mainly attribute macroeconomic fluctuations to changes in demand; economic policy analysis focuses on explaining what monetary and fiscal policies should be implemented to offset demand fluctuations, but almost no one is dedicated to explaining actual economic policy operations. Until the 1970s, the legacy of Keynes and the Great Depression ruled the study of business cycles and stability policies. Economists attribute macroeconomic fluctuations mainly to changes in demand.
In the 1970s, the shortcomings of early analysis became increasingly apparent. A stabilization policy based on existing theories cannot achieve the goal of economic policy at all. The economy of the Western world has always been in a state of stagflation - unemployment and inflation coexist, but prevailing theories cannot explain this. At the same time, macroeconomic fluctuations are not only due to demand fluctuations but also become increasingly clear. The role of supply fluctuations in the business cycle has become more prominent. In two related papers published in 1977 and 1982, Finn Kidland and Edward Prescott provided new analysis methods for macroeconomic development.
In 1982, Kidland and Prescott published an article to thoroughly review this phenomenon, laying a microeconomic foundation for macro-business cycle analysis. In their business cycle model, the actual fluctuations of technological development have caused changes in gross domestic product, consumption, investment, and working hours, and households and companies' expectations of consumption, investment, labor supply, and many other factors have an impact. Changes to the business cycle. Their model has been widely used in modern macroeconomics.