Tuesday, October 11, 2011

2011 Nobel Prize in Economics

…goes to Thomas Sargent and Chris Sims (excerpt):

The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2011

Press Release
10 October 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


Christopher A. Sims
Princeton University, Princeton, NJ, USA

"for their empirical research on cause and effect in the macroeconomy"

Cause and effect in the macroeconomy
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.

Sims’ work basically provided a way of side-stepping the Lucas Critique which had overturned econometric practices of a generation before. If policy affects the economy yet the economy prompts changes in policy, structural models which treat policy as exogenous to the economy won’t be valid. Sims got around this by treating all variables, including policy, as endogenous within a vector autoregression (VAR) framework.

VARs are now a standard part of any econometrician’s analytical toolkit and has begotten a whole host of derivative techniques such as Structural VARs, Bayesian VARs and Vector Error Correction Models (VECMs) with wide applications across the different fields of economics and econometrics.

Engle and Granger later addressed the issue of defining causality, for which they won the Economics Prize in 2003. Soren Johansen combined the two approaches (VARs and cointegration) and popularised the technique not just for economics but also in other fields such as medicine – the man seriously deserves a Nobel Prize of his own.

Sargent’s work I’m less familiar with, though he’s known as a proponent of rational expectations theory – which isn’t exactly my favourite subject.

Nevertheless, congratulations are in order – this year’s prize winners are probably as uncontroversial as they come, and well deserving of the award.


  1. Look at how these 2 so-called Nobel Laurel economists dodged simple questions such as US economic problem as well as E.U crisis.

    The way they 'answered' the questions is a joke. They should have though about such questions since they are a full time economists.

    Recent Nobel prize is somehow questionable especially in the field of economics. Maybe that's why the financial problems persists when we have such guys, Krugman included.

    I don't make this up, watch it!


  2. There's economists and then there are economists. Sargent's best work was in the 1970s, and Sim's in the early 1980s (Krugman won his Nobel prize for his insights on trade theory in the lates 1970s).

    Just because they carry the label economists doesn't necessarily mean they are qualified to comment on current issues - some are, and many aren't. It depends on your specialisation. You don't expect a tax accountant to have much to say about the corporate takeover code, or a conveyancing lawyer to be an expert in marriage laws under the Shariah code.

    To be blunt about it, there aren't many macro-specialists in Malaysia either. If you check the academic rosters of our universities, quite a few are in pretty esoteric fields - environmental economics, or poverty economics. While they may have a decent grounding in broader economic theory, that doesn't mean they are up to date or even knowledgeable at all about any sub-field of economics outside their own.

    For example, my specialisation is in monetary economics, and I'd dare argue monetary theory and exchange rate theory with anybody. But I wouldn't presume to do that in say labour or company theory.

    Quite frankly, I don't expect either Sims or Sargent to have much to contribute to current policy dilemmas. But that doesn't mean their Nobel laureates were undeserved.

  3. Then they shouldn't give advise the on how to solve the economic problems (many continue doing so). They should just stay away if they are so clueless about it or not in the specialize area.

    Modern economics fields is getting more and more like science fiction. Thus, the current Nobel laureates (economists) is undeserved.

  4. I wouldn't say science fiction - what's happened in economics is common to very many academic fields, including the hard sciences. You don't want a pediatrician doing surgery for example. It's just the specialisation of labour that's been going on for the last 2-3 centuries.

    As for academics (from the JokeEc page):

    One day a man walked into the main library of a major research university. He stopped at the reference desk and asked the librarian if she had any current books about economics and the economy.

    She answered that she did, and led the man to the reference shelves where the economics and economy books were.

    To the surprise of both the librarian and the man all of the books were off the shelf being used.

    ``That's OK,'' the man said. ``I'll just go to another library. You see, I'm a very busy man, and I set this weekend aside for studying economics and the economy.''

    The librarian said she understood and gave the man directions to the nearest research library. But her interest piqued, she asked: ``Why are you so urgent to study economics and the economy?''

    The man replied: "I'm an economist. I've been teaching at this university for the past ten years. I'm attending a business meeting on Monday, and I figure the economy has changed in the past ten years."

    That's unfortunately common in academic circles, and not just in economics (my boss goes on and on about how out of date accountancy and business teaching in universities is).

    Also from the same source:

    Economists don't answer to questions others make because they know what the answer is. They answer because they are asked.

    If you want real effective answers to current problems, don't ask professors, ask their grad students.

    Most of the work being acknowledged with Nobel recognition is either work done during or just after their PhDs. In that sense, the awards are still thoroughly deserved.

  5. the research which done on macroeconomics issue is essencial today because of the financil crisis of most world countries. we thanks alot for Thomas J.sargent and Christopher A.sims.