From yesterday's WSJ on the Nobel award to Kydland and Prescott:
Lawrence Summers, the president of Harvard and the former U.S. Treasury secretary, once wrote that the work of Messrs. Prescott and Kydland on business cycles had "nothing to do with the business-cycle phenomena observed in the United States or other capitalist economies." In an e-mail yesterday, Mr. Summers said the two professors "richly deserve" the prize because of the economic methods they introduced, even though "I like many others find their particular theories [about business cycles] implausible."
Summers is a distinguished economist. When he wrote this attack on real business cycle theory I took it seriously, and assigned the paper to my students. But we've just gone through a period which, in my view, provides an ideal example of real business cycle theory in action. Few would dispute that we've experienced a decade-long cycle driven by technical change in information technology. The 90's boom was fueled by investment in this sector, a process which had a huge impact on labor productivity. The recent recession was clearly associated with a collapse in hi-tech investment. This long cycle of boom and bust is exactly what Kydland and Prescott's "Time to Build" paper was about. After living through this for the past fifteen years or so, how can a mind as sharp as Larry Summers' still find the theory "implausible." I'm completely baffled by that comment.