Saturday, November 12, 2011

Sargent and Sims win Nobel prize in economics

Thomas Sargent at podium and Chirs Sims standing to the left.

Thomas Sargent and Chris Sims have truly had a strong impact on macroeconomics over the last four decades. Sargent drove the rational expectations revolution while Sims provided the econometric firepower to get us to understand the implications of shocks to an economy. There is not a macro economist alive today that has used or discussed their approaches to economics. You may not agree with the rational expectations revolution, but you have had to understand it and debate to be considered a serious economist. There have been excesses within rational expectations which are still being dealt with. Shocks will have real effects but the expectations change the behavior of economic agents. Building large econometric models to explain the behavior of an economy will never be done like efforts in the pre-RE environment.

Chris Sims will have as strong an impact as Sargent because techniques can be applied by all schools of thought. Sims, through vector autoregressive models, VAR, focuses on the impact of shocks to the economy. We can now measure shocks through time and see how they will play through the economy. Every econometric course focused on macroeconomics will have to learn the techniques of Sims.

We congratulate both for having a profound change on economics.

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