The pair, Edward C. Prescott, 63, and Finn E. Kydland, 60, will share the $1.3 million prize for their work on monetary and fiscal policy and on factors that influence business cycles.
"This is great news for University of California Santa Barbara," said Paul Desruisseaux, associate vice chancellor for public affairs. "We're thrilled for professors Kydland and Prescott."
Kydland is doing research abroad this academic quarter and will be on campus starting in January, when he is scheduled to teach Economics 101, Desruisseaux said. Prescott was a visiting professor of economics at UCSB from January to March, 2004.
Kydland's Nobel was the fifth for a faculty member at UC Santa Barbara since 1998. It was the second this year. Last week, David J. Gross was awarded a share of the physics Nobel Prize.
Kydland told the Associated Press that he learned about the prize during a lecture at the Norwegian School of Economics and Business Administration in Bergen, Norway.
"I was a little perturbed when they interrupted my lecture until I got to the secretary's office and found out what the phone call was about," he told the AP. "It is wonderful to get this recognition."
According to Lars Calmfors, a member of the prize committee, the pair's work helped reexamine the fundamentals of marcoeconomics and had a practical impact on how to organize and empower central banks.
In their writings, the duo analyzed how central banks were sometimes inconsistent in dealing with some issues as market forces changed. For example, the banks might be willing to accept rising inflation for a short-term decrease in unemployment.
In a video press release posted on the Nobel website, Calmfors explained that Kydland and Prescott's work led some countries to force central banks to stick to policies regardless of the change in market forces. The work was especially important for the European Union central bank, he said.
Calmfors also said that the two economists studied the business cycle and placed new emphasis on supply-side shocks like technology in explaining higher productivity. Their work was important in looking at the U.S. economy in the late 1990s, he said.
The Nobel Memorial Prize in Economic Sciences is the only award not established in the will of Swedish industrialist Alfred Nobel, the inventor of dynamite. The medicine, physics, chemistry, literature and peace prizes were first awarded in 1901, while the economics prize was set up separately by the Swedish central bank in 1968.
This year's Nobel Prize announcements began Oct. 4 with the prize in physiology or medicine going to Americans Richard Axel and Linda B. Buck for their work on the sense of smell. Last Tuesday, Americans Gross, H. David Politzer and Frank Wilczek won the physics prize for their explanation of the force that binds particles inside the atomic nucleus.
The chemistry prize was awarded Wednesday to Israelis Aaron Ciechanover and Avram Hershko and American Irwin Rose for their work in discovering a process that lets cells destroy unwanted proteins. On Thursday, Austrian feminist writer Elfriede Jelinek won the Nobel Prize in literature.
Kenyan environmental activist Wangari Maathai won the Nobel Peace Prize on Friday for her work as leader of the Green Belt Movement, which has sought to empower women, better the environment and fight corruption in Africa for almost 30 years. It was the first peace prize to be awarded for environmental work.
The Nobel Prizes are presented Dec. 10, the anniversary of Nobel's death. The peace prize is awarded in Oslo, and the other Nobel prizes are presented in the Swedish capital, Stockholm.
Associated Press contributed to this report.