Thomas J. Sargent and Christopher A. Sims on Monday were awarded the Nobel Memorial Prize in Economic Sciences for their empirical research addressing the causal relationship between economic policy and macroeconomic variables such as gross domestic product, inflation, employment and investments.
Mr. Sargent is Berkley Professor of Economics and Business, New York University, and senior fellow, Hoover Institution, Stanford University. Mr. Sims is Harold H. Helm ’20 Professor of Economics and Banking, Princeton University.
They will share equally the 10 million Swedish krona ($1.5 million) prize, conferred to them as winners of the 2011 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.
Their work “makes it possible to ascertain the effects of unexpected policy measures as well as systematic policy shifts,” the Royal Swedish Academy of Sciences, which conferred the award, said in a statement.
Their research, which was carried out independently of each other, examined the relationship when government “policy affects the economy, but the economy also affects policy,” the statement said.
“Expectations regarding the future are primary aspects of this interplay,” the statement said. “The expectations of the private sector regarding future economic activity and policy influence decisions about wages, saving and investments. Concurrently, economic-policy decisions are influenced by expectations about developments in the private sector.”
Rodney Sullivan, editor of the Financial Analysts Journal, published by the CFA Institute, said in an e-mail, “Sargent and Sims are among the most influential economists in the world. Their research has given us keen insights into the relationships between the decisions of individuals and the broader economy. … This research is highly relevant to helping the world emerge from the current economic stagnation.”
Bruce I. Jacobs, principal at Jacobs Levy Equity Management, said in an e-mail that the work of the two professors has had “a large impact” on quantitative finance.
“In forecasting the effects of macroeconomic policy or stock prices, one has to define the relationships at work,” Mr. Jacobs said in the e-mail. “These relationships are dynamic,” and sorting out cause and effect “is complicated by … feedback relationships. Economic policy influences the economy, but the economy also influences policy, which in turn influences the economy. In the same way, stock returns are influenced by the economy, but the economy is also influenced by stock prices …”
Their “seminal work incorporated rational expectations into macroeconomics, just as the efficient market hypothesis, also based on rational expectations, was shaping our views of financial markets.” he said. “Consideration of expectations led to more dynamic models of both the macroeconomy and the stock market.”