As anyone engaged in policymaking can attest, there are ample opportunities to practice the fine art of humility. On the one hand, it is important to act with the courage of your convictions; that is, if you are prepared to make decisions that affect the lives of your fellow citizens, you should believe as firmly as possible in the correctness of your stance. On the other hand, it is equally important to recognize when the weight of the evidence is against you and you have to amend your views. This is not always easy. What makes these changes more challenging is when someone introduces a new method of analysis and suddenly you must reconfigure how you do your work; the adage about teaching old dogs new tricks, however trite, is often salient in these cases.
The same holds true not just for individuals but for academic disciplines. Proposed changes to scientific methodology are met with justifiable skepticism and are rigorously challenged, for much is at stake—from personal careers to the direction of theoretical research and, many times, to policymaking. One such change in scientific methodology is described in this year's Annual Report essay, "The Transformation of Macroeconomic Policy and Research," by Ed Prescott, a monetary adviser to the Federal Reserve Bank of Minneapolis and co-recipient of the 2004 Nobel Prize in Economic Sciences.
Ed rightly uses the word "transformation" to describe the influence that his ideas have had on the economics profession. The methodological contributions made by Ed, along with his colleague Finn Kydland, have revolutionized how economists go about their business. Broadly speaking, those contributions have turned formerly static modeling techniques into dynamic exercises that more accurately replicate the way an economy really works. To borrow Ed's words: "[T]his is a story about how the macroeconomy finally came alive for macroeconomists." This is no small matter, and even Ed and Finn's detractors would agree that their methodological advances have had important implications for many areas of economic research.
Of course, it would be foolhardy to try to describe all the nuances of this transformation in this brief letter; that's the purpose of the following essay. However, before I leave you to Ed's work, I would like to take this opportunity to say that it has been a privilege to work with Ed over the years—he has served as a monetary adviser to our bank for nearly 25 years—and we are pleased to have this opportunity to share his ideas with you. Ed has received numerous plaudits since he received his Nobel award, but let me take this opportunity to publicly congratulate him on behalf of the Federal Reserve Bank of Minneapolis.
We hope you enjoy reading this year's Annual Report and, as always, we welcome your comments.
Gary H. Stern
Annual Report Essay:
The Transformation of Macroeconomic Policy and Research