Economics Nobel prize: Christopher Sims and Thomas Sargent

The New York Times provides the profile of this year Economics Nobel Prize winners - Christopher A. Sims and Thomas J. Sargent. The article touches on many interesting related subjects:


Attempts by both Conservatives and Progressives to claim the prize winners as their own (naturally The New York Times stresses their Democratic credentials):
"So it comes as a surprise, not least to Mr. Sims and Mr. Sargent, that these two now find themselves thrust into an uncomfortable spotlight. Conservative voices, like the editorial page of The Wall Street Journal, have claimed them as their own. The men’s work on economic cause and effect and the theory of rational expectations — which maintains that people use all the information available in making economic decisions — proves that Keynes had it wrong, these commentators say.

It would be a provocative thesis — if it were true. But Mr. Sims and Mr. Sargent say their work is being misread. Both, in fact, are longtime Democrats who maintain that government can, and should, play a role in economic affairs. They stand behind many recent policies of the Obama administration and the Federal Reserve. They even have some ideas about how European governments might defuse the running crisis on the Continent."

Essence of their work (if one can trust at all a popular-science article like this):
"Mr. Sims developed a statistical approach called vector autoregression, or V.A.R. It enables the testing of cause and effect — whether, for example, the money supply is affecting interest rates, or vice versa. That is a crucial determination if economic models are to have any accuracy, as the Nobel committee has noted.

V.A.R. has become a tool, albeit a highly specialized one, in financial analysis. It’s used in some models run by central banks, and, as Aaron Gurwitz, the chief investment officer at Barclays Wealth, says, it has been useful in “helping us understand the patterns in market volatility over time.”"

and (somewhat too general)
"GOOGLE “Thomas Sargent” and “rational expectations” and you’ll get hundreds of hits. Along with Robert E. Lucas Jr. of the University of Chicago, who won the Nobel in 1995, Mr. Sargent is widely considered one of the founders of the theory, though he says it had many earlier proponents, including Keynes.
...
Put simply, the idea of rational expectations is that in many economic situations, the outcome depends on what people expect to happen. That might sound obvious today, but in the ’70s and ’80s, many economic models, based on aspects of Keynesian theory, didn’t take expectations into account. Policies informed by those old models may have helped cause the stagflation of the ’70s. In 1977, Mr. Sargent wrote a paper, “Is Keynesian Economics a Dead End?”, which highlighted such models’ flaws."

Some economic outlook at the situation in Europe and the United States:
"In a prescient paper more than a decade ago, Mr. Sims warned of disaster to come in the euro zone if a new central bank wasn’t accompanied by a unified fiscal authority. To avoid disaster now, he says, the European Central Bank must show a willingness “to act as a lender of last resort” in Europe. If that happens, he says, markets may be able to stabilize long enough for Europeans to study a long “menu” of accompanying fiscal and political arrangements. 

Mr. Sargent has also written extensively about “budget constraints” and monetary policy. One influential study, “Some Unpleasant Monetarist Arithmetic,” written with Neil Wallace of Penn State, says a central bank will eventually run out of ammunition if the government fails to manage its debt. That analysis applies to the United States today, Mr. Sargent says."

Finally, interesting note on the analogy between the European debt crisis and the history of the United States, which I discussed in a recent post:
"Mr. Sargent notes that the United States moved from loose confederation to federal union — the arrangement embodied in the Constitution — in large part because of a crippling debt crisis. The parallels with Europe seem clear. Is he calling for a federal Europe? "