(Updates with Sims comment in sixth paragraph.)
Oct. 10 (Bloomberg) -- 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 exploring cause and effect in economic policy.
The two, both aged 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.
Sargent’s research has centered around the rational expectations hypothesis, which assumes people exploit available information and 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 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.
“The methods that I’ve used and Thomas developed are central to finding our way out of this mess” that the global economy is in, Sims said in an interview with Swedish broadcaster SVT, after the award was announced. He said he “couldn’t be happier” than to be able to share the prize with Sargent.
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 Berkley Professor of Business and Economics at New York University.
“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 inflation policies in the post-World War II era, when many countries initially tended to implement a high-inflation policy, the academy said.
Sims’s vector auto-regression analysis has been applied to examine, amongst other things, how interest-rate setting by central banks affects the economy.
“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.”
Sims has been a professor at Princeton University since 1999. He graduated with a bachelor’s of 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.”
The award’s official name is The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. The money, a gold medal and a diploma will be handed out to the laureates at a ceremony in Stockholm on Dec. 10, the anniversary of Nobel’s death.
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.
Annual prizes for achievements in physics, chemistry, medicine, peace and literature were established in the will of Alfred Nobel, the Swedish inventor of dynamite who died in 1896, and the first prizes were handed out in 1901. The prize in economics was set up by Sweden’s central bank in 1968. Past winners since 1969 include Milton Friedman, Amartya Sen, James Tobin, Paul Krugman, Robert Solow and Gunnar Myrdal.
--With assistance from Johan Carlstrom and Kim McLaughlin in Stockholm and Rich Miller in Washington. Editors: Tasneem Brogger, Christopher Wellisz.
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