Two US researchers won the 2011 Nobel Economics Prize on Monday for research on how different events affect economies and which could help find answers to the current crisis, the Nobel jury said. Thomas Sargent and Christopher Sims, both 68, have developed methods that untangle “the causal relationship between economic policy and different macroeconomic variables, such as GDP, inflation, employment and investments,” the Nobel jury said. “Their combined work constitutes a solid foundation for modern macroeconomic analysis. It is hard to envisage today’s research without this foundation,” it added.
Economies are constantly affected by both anticipated events, like long-term fiscal policy and shifts in monetary policies, and unanticipated events like sudden hikes in the price of oil or an unexpected drop in household consumption. The laureates’ work, carried out in the 1970s and 80s, provides methodologies that facilitate understanding of how both systemic policy shifts and so-called “shocks” affect the macroeconomy in the short and long run. Sargent, an economics and business professor at New York University, has worked with structural macroeconomics, analysing the reciprocal relationship between the expectations of the private sector regarding future policy and actual long-term policy decisions about wages, prices and investments.
Sims, an economics and banking professor at Princeton University, has meanwhile focused on “how shocks spread throughout the economy,” mapping the effects of temporary changes in economic policy, like sudden central bank rate hikes or other unexpected factors. While the pair worked separately, their work is complementary and “has been adopted by researchers and policymakers around the world,” the jury said. John Hassler, a member of the Nobel Committee at the Royal Swedish Academy of Sciences that attributes the prize, said the laureates’ methods could be used to understand the current economic crisis. “We don’t really have a good answer to what happened during the financial crisis nor what we should do in order to reduce the risk of something like this happening again, but we are pretty sure that the methods they have developed (can) help us in finding the answers to questions like that,” Hassler said.
Sims, interviewed by telephone from the Nobel press conference, also said he hoped his research could be useful for solving the current turmoil. “If I had a simple answer to that I would have been spreading it around the world. There’s no simple way to do it, it requires a lot of slow work looking at data,” he said. “But I think that the methods that I’ve used and that Tom (Sargent) has developed are central to finding our way out of this mess.” He pointed out that: “These methods have been used in many countries, and one of the things that have given them credibility is they tend to give consistent results.” Sims, who conducted research with Ben Bernanke – a former Princeton professor and the current US Federal Reserve chairman – has also conducted research on so-called “rational inattention,” or how people overlook information that is freely available to them, like stock indexes published in a newspaper.