News & Views item - October 2011 |
2011 Nobel Prize in Economics for Analyses of Cause and Effect in the Macroeconomy. (October 11, 2011)
The Royal Swedish Academy of Sciences has decided to award The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for 2011 to Thomas J. Sargent, New York University, New York, NY, USA and Christopher A. Sims, Princeton University, Princeton, NJ, USA.
for their empirical research on cause and effect in the macroeconomy
The media release from the Academy reads:
How are GDP and inflation affected by a temporary
increase in the interest rate or a tax cut? What happens if a central bank makes
a permanent change in its inflation target or a government modifies its
objective for budgetary balance? This year's Laureates in economic sciences have
developed methods for answering these and many of other questions regarding the
causal relationship between economic policy
and different macroeconomic variables such as GDP, inflation, employment and
investments.
These occurrences are usually two-way relationships – policy affects the
economy, but the economy also affects policy. Expectations regarding the future
are primary aspects of this interplay. The expectations of the private sector
regarding future economic activity and policy influence decisions about wages,
saving and investments. Concurrently, economic-policy decisions are influenced
by expectations about developments in the private sector. The Laureates' methods
can be applied to identify these causal relationships and explain the role of
expectations. This makes it possible to ascertain the effects of unexpected
policy measures as well as systematic policy shifts.
Thomas Sargent has shown how structural macroeconometrics can be used to analyze
permanent changes in economic policy. This method can be applied to study
macroeconomic relationships when households and firms adjust their expectations
concurrently with economic developments. Sargent has examined, for instance, the
post-World War II era, when many countries initially tended to implement a
high-inflation policy, but eventually introduced systematic changes in economic
policy and reverted to a lower inflation rate.
Christopher Sims has developed a method based on so-called vector autoregression
to analyze how the economy is affected by temporary changes in economic policy
and other factors. Sims and other researchers have applied this method to
examine, for instance, the effects of an increase in the interest rate set by a
central bank. It usually takes one or two years for the inflation rate to
decrease, whereas economic growth declines gradually already in the short run
and does not revert to its normal development until after a couple of years.
Although Sargent and Sims carried out their research independently, their
contributions are complementary in several ways. The laureates' seminal work
during the 1970s and 1980s has been adopted by both researchers and policymakers
throughout the world. Today, the methods developed by Sargent and Sims are
essential tools in macroeconomic analysis.
____________________________________________________________
Thomas J. Sargent, U.S. citizen. Born 1943 in Pasadena, CA,
USA. Ph.D. 1968 from Harvard University, Cambridge, MA, USA.
William R. Berkley Professor of Economics and Business at New York University,
New York, NY, USA.
Christopher A. Sims, U.S. citizen. Born 1942 in Washington, DC,
USA. Ph.D. 1968 from Harvard University, Cambridge, MA, USA.
Harold H. Helm '20 Professor of Economics and Banking at Princeton University,
Princeton, NJ, USA.
Read more about this year's prize |
Information for the Public Pdf 500 kb |
Scientific Background Pdf 600 kb |