The best economic policy will affect the expectations and decisions of investors and consumers, and the decisions of investors and consumers will lead to policy failure, thereby forcing policy makers to modify the policy, and the result of the modification is the best The policy was abandoned. In the late 1950s and early 1960s, traditional economics embodied in the so-called "Phillips Curve" believed that the only way to reduce unemployment was to implement high inflation policies. However, in the late 1960s and early 1970s, this theory began to be questioned.
In 1977, Kidland and Prescott published an article that argued that if economic policy makers lack the ability to make certain specific decisions in advance, they will often formulate policies that lead to higher inflation. They specifically mentioned one of the common problems in economic decision-making: the problem of time consistency.
The core of the problem of time consistency is: After thousands of choices, an economic policy is finally introduced. Once the policy is introduced, it will affect the expectations of households and companies on the policy. When these expectations are transformed into actual actions, they are considered The best policies are often not implemented. In this way, economic policymakers will make changes to their decisions, but the best policy will be discarded. Such results are not so much caused by the goals of economic policy makers that are different from those of the vast majority of the people, but rather are caused by different constraints on economic policies at different times.
The problem of time consistency is particularly fully reflected in monetary policy. Suppose that the policy maker's goal is small inflation and make this policy public; further suppose that such a policy leads to low inflation expectations and a small increase in wages. Once this happens, it will inevitably tempt policymakers to implement higher inflation policies, because this can reduce unemployment in the short term. Finn Kidland and Edward Prescott believe that such a temptation will cause the economy to fall into high inflation and become unable to extricate itself, and it will not help solve unemployment.
Kidland and Prescott’s second major contribution is the analysis of the driving forces of the business cycle. The results of this research have changed people's views on the causes of the business cycle. But more importantly, their methodology provides a basis for broadening business cycle research.
Business cycle: The actual fluctuations of technological development have caused changes in GDP, consumption, investment, and working hours. The expectations of households and companies on consumption, investment, labor supply and many other factors affect the changes in the business cycle. Before the 1980s, economists had been studying long-term growth and short-term macroeconomic fluctuations as two phenomena separately, and they used different methods. Long-term growth is considered to be determined by total supply, and technological development is its driving force; the business cycle is considered to be caused by certain elements of total supply surrounding the long-term growth trend. There is no real connection between these two views.