Featured Research

from universities, journals, and other organizations

2011 Nobel Prize in Economics: Cause and effect in the macroeconomy

Date:
October 10, 2011
Source:
Nobel Foundation
Summary:
The Royal Swedish Academy of Sciences is awarding The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for 2011 to Thomas J. Sargent New York University and Christopher A. Sims Princeton University for their empirical research on cause and effect in the macroeconomy.

The Royal Swedish Academy of Sciences has decided to award The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for 2011 to Thomas J. Sargent New York University and Christopher A. Sims Princeton University for their empirical research on cause and effect in the macroeconomy.

Cause and effect in the macroeconomy

How are GDP and inflation affected by a temporary increase in the interest rate or a tax cut? What happens if a central bank makes a permanent change in its inflation target or a government modifies its objective for budgetary balance? This year's Laureates in economic sciences have developed methods for answering these and many of other questions regarding the causal relationship between economic policy and different macroeconomic variables such as GDP, inflation, employment and investments.

These occurrences are usually two-way relationships -- policy affects the economy, but the economy also affects policy. Expectations regarding the future are primary aspects of this interplay. 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. The Laureates' methods can be applied to identify these causal relationships and explain the role of expectations. This makes it possible to ascertain the effects of unexpected policy measures as well as systematic policy shifts.

Thomas Sargent has shown how structural macroeconometrics can be used to analyze permanent changes in economic policy. This method can be applied to study macroeconomic relationships when households and firms adjust their expectations concurrently with economic developments. Sargent has examined, for instance, the post-World War II era, when many countries initially tended to implement a high-inflation policy, but eventually introduced systematic changes in economic policy and reverted to a lower inflation rate.

Christopher Sims has developed a method based on so-called vector autoregression to analyze how the economy is affected by temporary changes in economic policy and other factors. Sims and other researchers have applied this method to examine, for instance, the effects of an increase in the interest rate set by a central bank. It usually takes one or two years for the inflation rate to decrease, whereas economic growth declines gradually already in the short run and does not revert to its normal development until after a couple of years.

Although Sargent and Sims carried out their research independently, their contributions are complementary in several ways. The laureates' seminal work during the 1970s and 1980s has been adopted by both researchers and policymakers throughout the world. Today, the methods developed by Sargent and Sims are essential tools in macroeconomic analysis.

Thomas J. Sargent, U.S. citizen. Born 1943 in Pasadena, CA, USA. Ph.D. 1968 from Harvard University, Cambridge, MA, USA. William R. Berkley Professor of Economics and Business at New York University, New York, NY, USA.

Christopher A. Sims, U.S. citizen. Born 1942 in Washington, DC, USA. Ph.D. 1968 from Harvard University, Cambridge, MA, USA. Harold H. Helm '20 Professor of Economics and Banking at Princeton University, Princeton, NJ, USA.

The Prize amount: SEK 10 million, to be shared equally between the Laureates.

For further information, including backgrounders for the public and scientists and links for further reading, see: http://www.nobelprize.org/nobel_prizes/economics/laureates/2011/press.html


Story Source:

The above story is based on materials provided by Nobel Foundation. Note: Materials may be edited for content and length.


Cite This Page:

Nobel Foundation. "2011 Nobel Prize in Economics: Cause and effect in the macroeconomy." ScienceDaily. ScienceDaily, 10 October 2011. <www.sciencedaily.com/releases/2011/10/111010075152.htm>.
Nobel Foundation. (2011, October 10). 2011 Nobel Prize in Economics: Cause and effect in the macroeconomy. ScienceDaily. Retrieved September 19, 2014 from www.sciencedaily.com/releases/2011/10/111010075152.htm
Nobel Foundation. "2011 Nobel Prize in Economics: Cause and effect in the macroeconomy." ScienceDaily. www.sciencedaily.com/releases/2011/10/111010075152.htm (accessed September 19, 2014).

Share This



More Science & Society News

Friday, September 19, 2014

Featured Research

from universities, journals, and other organizations


Featured Videos

from AP, Reuters, AFP, and other news services

The Cost of Ebola

The Cost of Ebola

Reuters - Business Video Online (Sep. 18, 2014) — As Sierra Leone prepares for a three-day "lockdown" in its latest bid to stem the spread of Ebola, Ciara Lee looks at the financial implications of fighting the largest ever outbreak of the disease. Video provided by Reuters
Powered by NewsLook.com
U.S. Food Makers Surpass Calorie-Cutting Pledge

U.S. Food Makers Surpass Calorie-Cutting Pledge

Newsy (Sep. 18, 2014) — Sixteen large food and beverage companies in the United States that committed to cut calories in their products far surpassed their target. Video provided by Newsy
Powered by NewsLook.com
Stocks Hit All-Time High as Fed Holds Steady

Stocks Hit All-Time High as Fed Holds Steady

AP (Sep. 17, 2014) — The Federal Reserve signaled Wednesday that it plans to keep a key interest rate at a record low because a broad range of U.S. economic measures remain subpar. Stocks hit an all-time high on the news. (Sept. 17) Video provided by AP
Powered by NewsLook.com
Some Tobacco Farmers Thrive Amid Challenges

Some Tobacco Farmers Thrive Amid Challenges

AP (Sep. 16, 2014) — The South's tobacco country is surviving, and even thriving in some cases, as demand overseas keeps growers in the fields of one of America's oldest cash crops. (Sept. 16) Video provided by AP
Powered by NewsLook.com

Search ScienceDaily

Number of stories in archives: 140,361

Find with keyword(s):
 
Enter a keyword or phrase to search ScienceDaily for related topics and research stories.

Save/Print:
Share:  

Breaking News:
from the past week

In Other News

... from NewsDaily.com

Science News

Health News

Environment News

Technology News



Save/Print:
Share:  

Free Subscriptions


Get the latest science news with ScienceDaily's free email newsletters, updated daily and weekly. Or view hourly updated newsfeeds in your RSS reader:

Get Social & Mobile


Keep up to date with the latest news from ScienceDaily via social networks and mobile apps:

Have Feedback?


Tell us what you think of ScienceDaily -- we welcome both positive and negative comments. Have any problems using the site? Questions?
Mobile iPhone Android Web
Follow Facebook Twitter Google+
Subscribe RSS Feeds Email Newsletters
Latest Headlines Health & Medicine Mind & Brain Space & Time Matter & Energy Computers & Math Plants & Animals Earth & Climate Fossils & Ruins