NYU’s Sargent Shares Nobel With Princeton’s Sims for Economic Policy Work

New York University’s Thomas J. Sargent and Princeton University’s Christopher A. Sims shared the 2011 Nobel Prize in Economic Sciences for their work in sorting out cause from effect in the economy and policy.

The two, both 68, will share the 10 million-krona ($1.48 million) prize that comes with the award, the Royal Swedish Academy of Sciences, which selects the winner, said today in Stockholm.

“Although Sargent and Sims carried out their research independently, their contributions are complementary in several ways,” the academy said. “The laureates’ seminal work during the 1970s and 1980s has been adopted by both researchers and policy makers throughout the world. Today, the methods developed by Sargent and Sims are essential tools in macroeconomic analysis.”

Sargent’s research has centered around the rational expectations hypothesis, which assumes people base their expectations on constantly updated and reinterpreted information. Sims is known for his application of multiple- equation, econometric models -- known as vector auto-regression -- in predicting economic outcomes.

“Within the economics profession, they are absolutely at the top,” Robert Solow, winner of the Nobel economics prize in 1987 and professor emeritus at the Massachusetts Institute of Technology, said in a telephone interview. “They are very, very sophisticated designers of ways to get information out of the time series of economic data.”

Central Bankers

Central bankers and government officials use the work the two men have done to help determine how changes in policy affect the economy and vice versa, Solow added.

“There’s no simple way to apply it,” Sims said by phone during a press conference after the prize was announced, in response to a question on how his research could be used to analyze the current economic situation. “It requires a lot of slow work looking at data -- the methods I use and that Tom have developed are central to finding our way out of this mess.”

The two economists voiced pessimism about the outlook for the 17-member euro zone at a joint press conference at Princeton University in New Jersey.

Sims called the foundation of the monetary regime “precarious” because of the lack of a unified fiscal authority that can issue bonds and raise taxes. The departure of one or more nations from the union would not resolve that, he added.

Euro Prospects ‘Dim’

“The prospects for the euro are dim” if the region can’t find a way to share its fiscal burden, Sims said.

Sargent likened the situation facing the euro zone to that which the U.S. confronted early in its history, when the 13 states were each running their own economic policies and issuing their own debt. “The difficult thing is the politics,” he said.

Politics are also the trouble now in the U.S. as well, Sims suggested. There’s broad agreement among economists on what strategy the U.S. should follow, he said: adopt a plan to deal with the budget deficit while avoiding fiscal stringency in the short-run and maintaining an accommodative monetary policy.

“The problem is figuring out how in the real world to get these things done,” he said.

Sargent called U.S. budget policy “very uncertain” because the government can’t keep all the pledges it’s made on future benefits while keeping taxes down.

“It’s not clear which of the incredible promises are going to be broken first,” he said.

Stimulus Limited

Sargent’s work suggests that government stimulus programs such as those advocated by John Maynard Keynes have a limited effect on the economy because consumers and companies realize the measures will be temporary. That’s an argument that Republican lawmakers have used in opposing President Barack Obama’s proposals for spurring growth.

The award to Sargent “is very much a ‘non-Keynesian’ prize,” Tyler Cowen, professor of economics at George Mason University in Fairfax, Virginia, wrote on his blog.

“Temporary stimulus, sort of sugar-high economics are not what businesses are telling us they need to create jobs,” House Budget Committee Chairman Paul Ryan of Wisconsin said on NBC television’s Meet the Press program yesterday.

In an interview last year, Sargent defended his rational expectations hypothesis against charges that it failed to explain the behavior of borrowers and lenders in the run-up and subsequent crash of U.S. housing prices in the last decade.

‘Rational Expectations’

“Macroeconomists have done creative work that modifies and extends rational expectations in ways that allow us to understand bubbles and crashes in terms of optimism and pessimism,” he said in an interview published by the Federal Reserve Bank of Minneapolis in September 2010.

Sargent received his bachelor’s degree from the University of California at Berkeley in 1964, winning the medal as the university’s most distinguished scholar the same year. He obtained his Ph.D. at Harvard University in March 1968 and is the William R. Berkley Professor of Business and Economics at New York University. He spent much of his career teaching at the University of Minnesota.

“Sargent has shown how structural macroeconomics can be used to analyze permanent changes in economic policy,” the academy said. “This method can be applied to study macroeconomic relationships when households and firms adjust their expectations concurrently with economic developments.”

Part of Sargent’s work was based on a study of government policies in the post-World War II era, when many countries initially tended to implement a high-inflation strategies, the academy said.

Focus on the Data

Sims’s vector auto-regression analysis attempts to focus on the data and strip out assumptions about how the economy should work based purely on economic theory.

“One of Sims’s insights was, if you’re just trying to forecast the economy, economics is less important than sort of intelligent statistical application,” 1995 Nobel winner Robert Lucas, an economics professor at the University of Chicago, said on “Bloomberg Surveillance” with Tom Keene. “In some ways the economics was just getting in your way from doing that. Chris developed this vector auto regression technique, which is pretty much economic forecasting without much economics.”

Sims said that the “most extensive applications” of his research have been by central banks trying to work out the effects of monetary policy.

‘Untangle the Relationship’

“The main contribution of this work is to provide a way to untangle the relationship between interest rates and inflation, so we can see what the effect of interest-rate policy changes are on the price level and inflation, and separate that from the reverse causality that makes central banks react to inflation by changing interest rates,” he said in a press release issued by Princeton University in New Jersey.

Sims has been a professor at Princeton since 1999. He graduated with a bachelor’s in mathematics from Harvard in 1963 and earned his doctorate in economics there in 1968. He has held positions at Yale University, the University of Minnesota and Harvard and has been a member of the National Academy of Sciences since 1989.

“It may sound slightly trivial to award the prize for someone who has studied cause and effect, but it’s not that easy to study this in the macro economy because the connection is typically two-way,” Peter Englund, a professor of finance at the Stockholm School of Economics and permanent secretary of the academy, told Swedish television station SVT. “One changes economic policy because inflation looks like it is rising, but it could also be that inflation is reacting to the changed economic policy.”

Pleased to Share

Sims said he was surprised by the award and pleased to be sharing it with Sargent. He told reporters the academy had to call him twice because “my wife couldn’t find the talk button on the phone so we went back to sleep.”

He said he would keep the prize money in cash “for a while” and think about what he would do with it.

The 2010 economics prize was awarded to Peter Diamond, Dale Mortensen and Christopher Pissarides for their work on the efficiency of recruitment and wage formation as well as labor- market regulation.

To contact the reporters on this story: Janina Pfalzer at jpfalzer@bloomberg.net; Rich Miller in Washington at rmiller28@bloomberg.net;

To contact the editors responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net; Christopher Wellisz at cwellisz@bloomberg.net

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