Americans Thomas Sargent and Christopher Sims won the Nobel economics prize on Monday for research that sheds light on the cause-and-effect relationship between the economy and policy instruments such as interest rates and government spending. Hit the jump to read the rest of the story.
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Sargent and Sims — both 68 — carried out their research independently in the 1970s and ’80s, but it is highly relevant today as world governments and central banks seek ways to steer their economies away from another recession.
The Royal Swedish Academy of Sciences said the winners have developed methods for answering questions such as how economic growth and inflation are affected by a temporary increase in the interest rate or a tax cut.
“Today, the methods developed by Sargent and Sims are essential tools in macroeconomic analysis,” the academy said in its citation.
Sargent is a professor at New York University, and Sims is a professor at Princeton University.
The academy cited the two “for their empirical research on cause and effect in the macroeconomy.”
Sims told a news conference in Stockholm by telephone that he was sleeping when he got the call from the prize committee and that he had not expected to win.
“Actually, at first we were called twice and my wife couldn’t find the talk button on the phone so we went back to sleep,” he said.
Sims said there was no easy way in which his work could help resolve the current financial turmoil.
“I don’t have any simple answer, but I think the methods that I have used and Tom has developed are central to finding our way out of this mess,” he added. “I think they point a way to try to unravel why our serious problems develop and new research using these methods may help us lead us out of it.”
Asked how he would invest his half of the $1.5 million award given the turbulence of today’s financial markets, Sims said: “First thing I’m gonna do is keep it in cash for a while and think.”
Sargent’s wife Carolyn Sargent told The Associated Press her husband was very quiet when he learned he’d won.
“I think he’s in awe,” she said. “He was rushing to teach.”
She said he went about his usual routine and was taking the train from New York City to Princeton, New Jersey, where he is teaching this semester.
The academy said Sargent showed how “structural macroeconometrics” can be used to analyze permanent changes in economic policy — a method that can be applied to study how households and firms adjust their expectations concurrently with economic developments.
Sims 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, like an increase in the interest rate, the academy said.
“Sargent has primarily helped us understand the effects of systematic policy shifts, while Sims has focused on how shocks spread throughout the economy,” the academy said.
The economics prize capped this year’s Nobel announcements. The awards will be handed out on Dec. 10 — the anniversary of prize founder Alfred Nobel’s death. The economics prize is not among the original awards established in Nobel’s 1895 will, but was created in 1968 by the Swedish central bank in his memory.
