Scand. J. of Economics 93(2), 161-178, 1991
The Econometrics of the General Equilibrium Approach to Business Cycles*
Finn E. Kydland
Carnegie-Mellon University, Pittsburgh PA, USA
Edward C. Prescott
Federal Reserve Bank and University of Minnesota, Minneapolis MN, USA
The founding fathers of the Econometric Society defined econometrics to be quantitative economic theory. A vision of theirs was the use of econometrics to provide quantitative answers to business cycle questions. The realization of this dream required a number of advances in pure theory—in particular, the development of modern general equilibrium theory. The econometric problem is how to use these tools along with measurement to answer business cycle questions. In this essay, we review this econometric development and contrast it with the econometric approach that preceded it.
Early in this century American institutionists and members of the German historical school attacked—and rightfully so—neoclassical economic theory for not being quantitative. This deficiency bothered Ragnar Frisch and motivated him, along with Irving Fisher, Joseph Schumpeter, and others, to organize the Econometric Society in 1930. The aim of the society was to foster the development of quantitative economic theory—that is, the development of what Frisch labeled econometrics. Soon after its inception, the society started the journal Econometrica. Frisch was the journal’s first editor and served in this capacity for 25 years.
In his editorial statement introducing the first issue of Econometrica (1933), Frisch makes it clear that his motivation for starting the Econo-
* We acknowledge useful comments of Javier Diaz-Giménez on an early draft. This research was partly supported by a National Science Foundation Grant. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.