Edward C. Prescott, a Nobel Prize-winning economist at the University of Minnesota and the Federal Reserve Bank of Minneapolis whose work guided the world's central banks into long-term policymaking, has died.
He was 81.
"He was one of the greatest economists of the last 50 years — and I would argue one of the great economists of all time," said V.V. Chari, an economics professor at the U who was his student and later his colleague. "He basically changed both the way economists do their work and he changed the way policies are made."
Prescott taught at the U from 1980 to 2003, helping to further elevate the stature of the university's economics department. He also served as an advisor to the Minneapolis Fed for more than four decades up until the time of his death.
"Ed was a revolutionary thinker in economics and played a fundamental role in transforming the research division of the Federal Reserve Bank of Minneapolis into one of the premier research institutions in macroeconomics in the world," the bank said in a statement.
In addition to his research, Prescott left a lasting mark on the field through his mentorship of numerous graduate students who have gone on to become leading academics at some of the top economics departments around the U.S.
During his time at the U, he advised more than 50 doctorate students and served on the thesis committees of many more.
Prescott's guidance was often cryptic and took awhile to sink in, but he prodded both students and colleagues to come up with new and innovative ideas.
"He was somewhat difficult to understand," Chari said. "We'd say, 'What's he talking about? That's incomprehensible.' Then three weeks later we'd slap our head and say, 'Oh my God, that's what I should have been doing all along!'"
In 2004, a year after he left the U to go to Arizona State University, Prescott won the Nobel Prize in economics along with Finn Kydland. The royal academy cited two of their contributions to the field in particular.
One is sometimes referred to as the concept of "time consistency." The idea is that desired outcomes are only possible if policymakers commit to not changing policies. That paved the way for the movement in the 1990s towards the now well-accepted notion of having an independent central bank that is not swayed by political forces. It also pushed policymakers to set interest rates according to well-established rules, such as the Federal Reserve's current goal of keeping inflation at 2%.
The second contribution was in deepening the understanding of the driving forces behind business cycles. Prescott and Kydland moved away from some of the prevailing Keynesian models of the 1970s to look at the role of the pace of technological progress — new products, new investments, new ideas — in propelling those cycles.
"He clearly influenced our thinking at the Minneapolis Fed," said Art Rolnick, the bank's former director of research. "He was such an incredible intellect. He was constantly pushing us to dig deeper."
Rolnick recalled the day Prescott walked into his office telling him that he was leaving the U to go to Arizona State. "I knew he was going to get the Nobel Prize," Rolnick said. "I didn't want to lose him."
So they agreed to an arrangement in which Prescott would spend half of the year — including the winters — in Arizona and the other half in Minneapolis at the bank. He continued splitting his time between the two locations until the last couple of years.
Prescott died on Sunday in Paradise Valley, Ariz.
Born in Glens Falls, New York, he attended Swarthmore College and received his doctorate in economics at Carnegie Mellon University in 1967.
He met economist Robert Lucas at Carnegie Mellon. Together, they began working on the idea that people have "rational expectations" and are no smarter or dumber than economists who are modeling their behavior.
When he joined the U, Prescott continued to explore that idea along with a group of others in the economics department who became known as the "four horsemen" for disrupting the field of macroeconomics. Their revolutionary research helped draw attention away from institutions on the East and West Coasts, which had often dominated the field of economics.
Two others in that group — Tom Sargent and Christopher Sims — also went on to win Nobel prizes after they left the U. And the fourth, Neil Wallace, is still considered a contender for one.
In addition to the U and Arizona State, Prescott also taught at the University of Pennsylvania, Carnegie Mellon and the University of Chicago.
Survivors include his wife, Janet, their children Ned, Wynne and Andy, six grandchildren and a brother and sister.