American economists Thomas Sargent and Christopher Sims, both 68 years of age, were awarded the Nobel Prize on Monday for their path-breaking work on developing tools that policymakers are probably using frenetically today in their bid to extricate the economy from the persistent global economic downturn.
Recognising the two economists’ “empirical research on cause and effect in the macroeconomy,” the Royal Swedish Academy of Sciences said that it decided to award the so-called Economics Nobel to Professors Sargent and Sims for their seminal research during the 1970s and 1980s that resulted in “essential tools in macroeconomic analysis.”
Although Professor Sargent, from New York University, and Professor Sims, from Princeton University, carried out their research independently, their contributions were complementary in several ways, the Academy said, in presenting them with the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for 2011.
Professor Sargent demonstrated how structural macroeconometrics could be used to analyse permanent changes in economic policy – including the complex modelling of reactive changes in the behaviour and expectations of households and firms. He examined, for example, the post-World War II era of high-inflation policies and the eventual introduction of systematic changes in economic policy that allowed a reversion to a lower inflation rate.
Professor Sims on the other hand used the advanced econometric technique of vector autoregression to study the impact of temporary changes in economic policy on the economy.
A common application of this scenario, and one that is likely used across the developed and eveloping world today, is the study of effects of an interest rate hike by a central bank.
A classic case that Professor Sim’s data tools could be applied to include the scenario where inflation decreases over several years as a result of lower money supply, but economic growth declines in the short run due to lower aggregate investment demand and does not revert to its normal development until after a couple of years.
The two economists’ tools are in vogue in mainstream macroeconometric analysis today and would probably resonate strongly with the tools used by the United States Federal Reserve. The Fed is facing an acute shortage of instruments to rev up the economy’s growth rate in the face of an already near-zero interest rate and a stubbornly high rate of unemployment.
