15 October 1980

THIS YEAR’s PRIZE IN ECONOMICS AWARDED FOR EMPIRICAL ANALYSES OF BUSINESS FLUCTUATIONS

The Royal Swedish Academy of Sciences has decided to award the 1980 Alfred Nobel Memorial Prize in Economic Sciences to

Professor Lawrence R. Klein, University of Pennsylvania, USA,

for the creation of economic models and their application to the analysis of economic fluctuations and economic policies.

Models of Business Fluctuations in USA
During the last three decades, Lawrence Klein has proved to be the leading research worker within the field of the economic science which deals with the construction and analysis of empirical models of business fluctuations. He started his career in this field by publishing a paper in 1950 in which he presented attempts to specify, numerically, some different models of the American economy during the interwar period. In the following years, he continued his research on this line and made several new models, among which, the one constructed in collaboration with Arthur Goldberger became the most famous.

Through his building of models, Klein renewed the attempts at econometrical macro-analysis that Jan Tinbergen had begun in the 30s. He used, however, a different economic theory as well as a different statistical technique. His aim was also a different one. Whilst Tinbergen aimed primarily at the analysis of business conditions and price movements, Klein wanted, above all, to make an instrument for forecasting the development of business fluctuations and for studying the effects of economic-political measures.

Klein’s early publications are mainly of a methodological character. However, by and by, his work became characterized by an aim to construct and make use of the models for practical purposes. In the course of the 1950s his USA models became firmly established as a successful instrument for short-term forecasts, and further, he collaborated in the construction of econometric models in several countries, among them, the United Kingdom and Canada. As a link in this aim, at the beginning of the 60s, he became the leader of an extensive research project, “The Brookings-SSRC Project”. The aim of this large project was to construct a detailed econometric model and use it for forecasting the short-term development of the American economy. Some time later, Klein set out to construct another model,”The Wharton Econometric Forecasting Model”. This model, which is considerably smaller than the Brookings model, has achieved a very good reputation for its analysis of business conditions, and is nowadays regularly used for forecasts of fluctuations in national product, export, investments, consumption, etc., and to study the effect on these variables of changes in taxation, public expenditure, rising oil prices, etc. As a matter of fact, it has – during Klein’s active leadership – become a continuous research project with constant follow-up of forecasts and consecutive revisions.

International Coordination of Business Models
At the end of the 60s, a new large research project, “LINK”, was started in which Klein has played a central part, both as initiator and as an active research leader. The aim of this project is to coordinate econometric models in different countries . The idea is that this will improve the possibilities to analyze the diffusion of business fluctuations between different countries and to make forecasts of international trade and capital movements. Possibilities would also be created to study how the economic effects of political measures in one country spread to other countries, and maybe, later, have repercussions on the economy of the original country. As an example of applications can be mentioned a study of how an increase in the price of oil influences inflation, employment and trade balance in different countries.

In empirical macroeconomic research, the LINK project has opened up a completely new line of development of great theoretical and practical value. It has also had great influence in promoting the building of econometric models in those countries taking part in the project. This includes not only most of the OECD-countries, but also the Socialist nations and some less developed countries.

Impact of Klein’s Work
Through his publications and also through his extensive guidance to groups of research workers in different countries, Klein has, to a high degree, stimulated research on econometric forecasting models and on the possibilities of using such models for practical analysis of economic policies. Thanks to Klein’s contributions, the building of econometric models has attained a widespread, not to say, universal use. It is now to be found all through the world, not only at scientific institutions, but also in public administration, political organizations and large enterprises. Few, if any, research workers in the empirical field of economic science, have had so many successors and such a large impact as Lawrence Klein.