ICAN economists Christopher Sims and Thomas Sargent were jointly awarded this year’s Nobel prize for economics, it was announced yesterday.
The two have been praised for their work on cause and effect analysis. In awarding the 2011 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, as the prize is formally known, the decision-making committee said “it would be nearly impossible to imagine the field without them”.
Sims (pictured right) and Sargent (top right), professors at Princeton and New York universities respectively, carried out their work independently of one another. However, their “contributions are complementary in many ways”, the committee said.
Cause and effect in economics can be difficult to establish and measure because of the two-way relationships between factors studied. In particular, the pair looked at the two-way relationships between monetary policy and the broader macroeconomy.
Sims’ work in the 1970s measured the impact of temporary changes in variables such as interest rates on the wider economy.
As a result, vector autoregressions are “an indispensable tool for applied researchers”, the committee said.
Sargent, on the other hand, considered longer-term changes. For example, he measured households’ inflation expectations rising as a result of policies implemented in the post-second world war era.
He made “substantive contributions to the study of monetary policy in his analyses of historical inflation episodes throughout the world”.
“The methods developed by Sargent and Sims are essential tools in macroeconomic analysis,” the committee explained.
The 10m Swedish krona (£960,000) prize will be split evenly between them.
“We’re just bookish types that look at numbers and try to figure out what's going on,” Sargent said in an interview posted on the Nobel Prize website. “We try to experiment in our models before we wreck the world.”