Thomas Sargent and Christopher Sims win Nobel prize for economics

US academics praised for work modelling the impact of central bank and government policies on macro-economic growth

Two US academics have won the Nobel prize for economics for their work modelling the impact of central bank and government policies on macro-economic growth.

Thomas Sargent and Christopher Sims will receive 10m kroner (£1m) for helping policymakers understand expectations of economic policy changes and how the changes themselves interact with each other and influence the path of policymaking.

Prof Sargent, who works at New York University, has pursued similar research to Prof Sims, who is a professor at Princeton University, which the Nobel committee said was complementary.

Sims told a press conference after the award was announced: "I have been telling people I wouldn't be getting the prize, but I couldn't be happier getting it with my colleague."

The Nobel committee said the economists had enhanced the understanding of cause and effect in macro-economic modelling, allowing policymakers to better estimate the effect of their own policies and other influences such as falling productivity or rising inflation.

"They addressed the 'central and classical' questions in economics," it said.

They have attempted to "sort out cause and effect" in economic theory and especially how expectations of the future affect decision making in the present.

Sims and Sargent have looked at many chicken-and-egg questions including whether central banks push up inflation through raising interest rates or whether they raise rates in anticipation of inflation rises already in the pipeline. "They have developed methods to help define 'what caused what' in economics such as sudden oil price rises or changes in productivity," said a committee spokesman.

Sims said: "The methods I and Tom have used are central to finding our way out of this mess. I don't think my research and methods have any simple or direct implications for the current situation, but new research based on our methods may help us out of it."

The economics prize is not among the original awards established by Swedish industrialist Alfred Nobel in his 1895 will, but was created in 1968 by the Swedish central bank in his memory.

Sims said each person who won the prize was representing the work of many other people, so it was not only an honour, but a responsibility.

Asked what he planned to do with the money from the prize, he said volatile investment markets would encourage him to keep it in cash "for a while".

The Nobel committee has been criticised for awarding the prestigious prize to free market economists who promoted research into "pure markets" and theories of equilibrium achieved through unfettered or unregulated markets.

These theories were championed by the Chicago school of economists, which was forced to defend itself during the banking crisis after many policymakers blamed the crash on the failure of "self-regulating markets".

Last year's prize was won by the US academics Dale Mortensen and Peter Diamond, with London School of Economics professor Christopher Pissarides, for developing a theory that helps explain why many people can remain unemployed despite a large number of job vacancies.

Pissarides has criticised the UK government's economic policies, arguing it is vital to get people back to work as soon as possible.

Last year he said: "They are probably cutting the budget a little too fast. The advantage of gradualism is that you don't suddenly get lots of people out of work."

Last week Pissarides repeated his warning that the government was making cuts in public spending that made the unemployment situation worse.

Favourites to win this year's prize were Robert Barro and Paul Romer, who have conducted extensive research into ways that public and private intervention can promote growth.

Romer, a former senior fellow at Stanford University and now a colleague of Sargent at New York University, was tipped for his books and papers on how technology and development drive growth.

Romer has constructed mathematical models showing how technological advances are the result of specific decisions to invest in research and development.

Are markets rational?

One major criticism of Nobel prize winners Christopher Sims and Thomas Sargent is how they build theories on the rational action of consumers and markets when many believe they are anything but.

Measuring how a rise in rates dampens inflation should be straightforward, but does it have a direct impact or does it depend what prices are pushing up inflation? How much does the central bank anticipate rises and falls in inflation?

These are live discussions today as the US Fed and the Bank of England bet that theories charting the cause and effect of rate policy can end the current crisis.

Quantitative easing is another way to lower interest rates and increase demand, but the effect on consumer spending has proved limited. Does that refute their theory? Sims says his methods could show policymakers where to put their money for the greatest effect. Maybe George Osborne should read their work.


Phillip Inman, economics correspondent

The GuardianTramp

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