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American economists share Nobel Prize

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Catherine Rampell
Last Updated : Jan 21 2013 | 12:40 AM IST

The Nobel prize in economic science was awarded on Monday to Thomas J Sargent at New York University and Christopher A Sims at Princeton University for their research looking at the cause-and-effect relationship between economic policy and the broader economy.

Their work uses statistical analysis to disentangle the question of whether a policy change that happened in the past affected the economy or whether it was made in anticipation of events that policymakers thought would happen later. This research has also helped economists better understand how people’s expectations for policy affect the economy.

Sims said on Monday that his research was relevant for helping countries decide how to respond to the economic stagnation and decimated budgets left by the financial crisis.

“The methods that I’ve used and that Tom has developed are central for finding our way out of this mess,” he said. But asked for specific policy conclusions of his research, he responded, “If I had a simple answer, I would have been spreading it around the world.”

Sims, 68, who is president-elect of the American Economic Association, has primarily looked at temporary policy changes, such as a surprise in government finances or a change in the interest rate. For example, his methods have been used to determine whether a central bank’s decision to raise the interest rate affected inflation or whether bank officials raised the interest rate precisely because they expected that inflation change later on.

The prize committee at the Royal Swedish Academy of Sciences said in a statement that his research has tried to develop a systemic way for distinguishing between unexpected shocks to the economy, such as a change in oil prices or government finances, and expected changes.

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His methodology, developed in the 1970s, has been tremendously influential in subsequent decades among all flavours of economists. It helped lend credence to New Keynesianism, the theory that says that the economy can go into recession because there is not enough demand, and has been the basis of important papers by Ben S Bernanke, the Federal Reserve chairman, and Olivier Blanchard, the chief economist at the International Monetary Fund.

Sargent, 68, on the other hand, has focused on longer-term structural changes in the economy, such as setting a new inflation target. His research has analysed historical data to better understand how these types of policy changes affect the economy over time. He has also conducted experiments in a sort of laboratory setting to examine how new policies might affect the economy.

The two economists were awarded for work that they did independently of each other but that the prize committee said was complementary.

Both were expected to speak at Princeton later on Monday.

“Today, the methods developed by Sargent and Sims are essential tools in macroeconomic analysis,” the citation said.

Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel is not one of the original Nobel prizes. It was created in 1968 and is awarded annually “according to the same principles as for the Nobel Prizes,” first begun in 1901.

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First Published: Oct 11 2011 | 12:48 AM IST

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