Two American economists, Thomas Sargent and Christopher Sims, were awarded the Nobel Prize in Economics on Monday for advances in understanding how government policy, as well as expectations and unexpected shocks, can affect the economy.
The $1.48 million award, to be shared by the two academics, honors research conducted independently in the 1970s and ‘80s, at a time when the world was struggling with inflation. But the models they developed are also relevant to the current economic slump, when the issue is how to cut deficits and restore growth.
“Today, the methods developed by Sargent and Sims are essential tools in macroeconomic analysis,” said the Royal Swedish Academy of Sciences in a statement announcing the award on Monday morning.
The academy especially highlighted their work in understanding the complex cause-and-effect relationships in macroeconomic analysis. For example, the oil price hikes in the 1970s set world economies back on their heels, driving up inflation and propelling governments into strong, anti-inflationary measures.
But the economy also responds to expectations of future policy or investment decisions by government and the private sector, the economists found.
Both Mr. Sargent and Mr. Sims criticized the macroeconomic models used by most governments and banks of their day for not taking expectations into account. They used historic data to show how such two-way relationships actually worked – methods of analysis that were subsequently picked up by government and financial analysts worldwide.
“Sargent has primarily helped us understand the effects of systematic policy shifts, while Sims has focused on how shocks spread throughout the economy,” said the academy, in a briefing paper on this year’s award. “Their combined work constitutes a solid foundation for modern macroeconomic analysis. It is hard to envisage today’s research without this foundation.”
Sargent, born in Pasadena California, received his PhD from Harvard University in 1968. He currently is William R. Berkley professor of Economics and Business at New York University. He is best known for showing how “structural macroeconometrics” can be used to analyze permanent changes in economic policy, most notably concerning inflation policies after World War II.
Sims, born in Washington, D.C., also received his PhD from Harvard University. He is Harold H. Helm ’20 professor of Economics and Banking at Princeton University. He is best known for using so-called “vector autoregression” to analyze how the economy is effected by “shocks” or other temporary changes in economic factors.
Nobel prizes have been awarded annually since 1901 in physics, chemistry, medicine, peace and literature. The prize in economics was established in 1968, and most of its recipients since then have been Americans. Past US winners include Paul Samuelson (1970), Kenneth Arrow (1972), Milton Friedman (1976), James Tobin (1981), Robert Solow (1987), John Nash (1994), Paul Krugman (2008), and Elinor Ostrum (2009), the first woman to be awarded the prize.