Econintersect: Thomas Sargent (left) of New York University and Christopher Sims (right) of Princeton University have been named as the 2011 winners of the Nobel Prize for Economics. The pair carried out independent research in the 1970s and 1980s about how the macroeconomy reacts to policy actions such as interest rate changes, tax changes and government spending. A spokesman for the Nobel Committee said that the work of the two honorees is used in all central banks of the developed world.Sims had a realistic assessment of how his work could help resolve the financial crisis. From the Boston Globe:
Sims said there was no easy way in which his work could help resolve the current financial turmoil.
“I don’t have any simple answer, but I think the methods that I have used and Tom has developed are central to finding our way out of this mess,” he added. “I think they point a way to try to unravel why our serious problems develop and new research using these methods may help us lead us out of it.”
Further details from the Nobel Committee, as reported in the Boston Globe:
The academy said Sargent showed how “structural macroeconometrics” can be used to analyze permanent changes in economic policy — a method that can be applied to study how households and companies adjust their expectations concurrently with economic developments.
Sims 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, like an increase in the interest rate, the academy said.
“Sargent has primarily helped us understand the effects of systematic policy shifts, while Sims has focused on how shocks spread throughout the economy,” the academy said.
The winners developed models to measure the sometimes surprising ways that people respond to changes in economic policy.
The modeling done by the two economists shed light on how human behavior is changed by policy changes such as new taxes such that tax revenues do not change in the way that might have been assumed. The example mentioned in the Boston Globe involved raising taxes on corn to get more tax revenue backfiring when people switch to wheat and tax revenue actually goes down.
The Huffington Post has a video about the announcement:
Sources: Boston Globe and The Huffington Post
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