Open Lecture by Nobel Laureate Finn E. Kydland On April 14th, the Nobel Prize winner Finn E. Kydland delivered an open lecture. The auditorium at Dae-Woo hall was filled with people—not only students from various universities but also CEOs and Yonsei Alumni. Finn E. Kydland is a Norwegian economist and was co-awarded the Nobel Prize with Edward C. Prescott in 2004 for contributions to the studies in time consistency, economic policy and the driving forces behind business cycles. Prof. Kydland joined the faculty of the University of California at Santa Barbara in 2004. He also served as a consultant research associate to the Federal Reserve banks of Dallas, Texas, and Cleveland, Ohio. He currently teaches in Yonsei as SK Chair Professor. The Prescott-Kydland paper demonstrated how policy-consistency is a significant factor. They also worked on how technological changes or supply shocks (e.g. oil price hikes) can cause short- term fluctuations around the long-term economic growth path. In accordance with this, today’s lecture focused on how the long-run policy consistency has proved to result in the eventual economic growth. Professor Kydland said that he was going to give a relatively easy lecture that day because there were so many people with different levels of specialty. First, he started with graphic data on the real GDP per capita of many nations in different continents. Some nations show consistent rise on graph whereas others display stagnant or even downward lines. He attributed these varied graphs to the level of consistency of each government. Further, he remarked that he would explain what fosters or hampers economic growth and development with lessons from Argentina, Ireland, Chile, Mexico, Finland and Japan. For this purpose, he introduced the concept of model economics, which explicitly patterns people’s dynamic decision problems, for example savings behavior. What he offered in the lecture was to explain such behavior from the perspective of model economics. Prof. Kydland made notable emphasis on the role of government. He mentioned two different governmental policies: fiscal policy and monetary policy. "Temporary income-tax cuts (as a part of fiscal policy) have very little effect on consumer-spending, Investment in infrastructure is a better policy, instead," he said. While fiscal policy has advantages and disadvantages, monetary policy has clear advantages for economy since it does not jumpstart the economy immediately unless it leads to the drop in money multiplier. Therefore, the injection of liquidity is not inflationary unless it makes up for the drop in multiplier. Quantity of money equals the money multiplier multiplied by monetary base (liquidity) The inconsistency of government policy managed for the immediate visible short-term effects is very dangerous. The examples he gave of these policies were as follows: increasing tax on physical and human capital, partially reneging (defaulting) on government debt (say, through surprise inflation), and depositing freezes. The Argentine government lost its credibility since it used such nearsighted policies so frequently that investors came to be reluctant to trust the government. During the 1980s, Argentine’s GDP per working age person had dropped drastically. The professor said, "More investment should have be made during this period since prices of physical and human resources were much cheaper. Argentina would have recorded more economic growth in the 90s if this had been done." On the other hand, Ireland had expanded free years of schooling since 1960. In the 1990s, the Irish government introduced tax policy geared for the long run, which had lowered tax rates with commitment for the next 20 years. The two nations demonstrate how consistency has produced different economic results. From the examples of Chile and Mexico, Prof. Kydland stated that the government should follow the market principle as well. In the early 1980s, Chile and Mexico had suffered economic crises but they prescribed different measures. While the Mexican government stepped in and took over the banks, the Chilian government executed policies compatible with the market. Not surprisingly, Mexico could not recover from low-economic productivity. The same goes for Finland and Japan: Finland had undergone shocks from the dried-up trade with the Soviet Union while Japan went through the real-estate market collapse. Finland left its policy in the hands of the market while Japan could not overcome long-lasting depression due to the government’s interventionist policy. South Korea also successfully recovered from IMF crisis since it had its restructuring plans geared to the market. Compared to other Asian countries, Korea revived its economy earlier. In summary, Prof. Kydland underlined that government policy has to be credible and forward-looking and market-oriented. The government should focus on incentives for productivity growth (innovation) and capital accumulation in the long-term. Good policy may even guarantee that there is potential in poor nations for, not 1-2 % but 1000-2000 percent income increases.