Nobel economists have no quick solutions

2011-10-10 21:31

Stockholm - Americans Thomas Sargent and Christopher Sims shared the Nobel Prize in economics on Monday for work that governments use to gauge the effect of policy, but they had no easy answers to a global crisis one called simply "this mess".

Central to research the two conducted separately in the 1970s were efforts to model and quantify cause and effect in economies, including the complex interplay of state and central bank policy with the expectations of people and businesses.

"Panics and crises, ... what's going on in Europe now with the euro, that's all about expectations about what other people are going to do," Sargent, 68, from New York University, said in an interview aired on the Nobel Prize organisation's website.

For example, government spending to bounce an economy out of slump may have its impact limited by people seeing the limits to state finances and expecting the stimulus to run out.

But, while his research had "tightened" ideas about how expectations influenced policies and their impact, Sargent cautioned that he and Sims, long colleagues at the University of Minnesota, had no easy answers to today's crisis.

"We're just bookish types that look at numbers and try to figure out what's going on," Sargent said. "We try to experiment in our models before we wreck the world."

Sims, also 68 and now at Princeton, said of the world's present financial troubles: "If I had a simple answer to that I would have been spreading it around the world ... It requires a lot of slow work looking at data, unfortunately."

But he said: "The methods that I have used and that Tom has developed are essential to finding our way out of this mess."

The Royal Swedish Academy of Sciences said it made the $1.5m award in honour of "empirical research on cause and effect in the macroeconomy" and said their work laid the foundation for modern macroeconomic analysis.

"One of the main tasks of macroeconomic research is to comprehend how both shocks and systematic policy shifts affect macroeconomic variables in the short and long run," the Academy said in a statement. "Sargent's and Sims's awarded research contributions have been indispensable to this work."

Cause and effect

Sargent developed a mathematical model in his work and described it in a series of articles in the 1970s. Sims wrote an article in 1980 which introduced a new way of analysing data using a model called vector-autoregression.

Torsten Persson of Stockholm University, who sits on the prize committee, said it was unclear that their work was of immediate remedial use, as ministers and central bankers try to balance efforts to promote growth in output and employment with concerns about cutting state debts and rising inflation.

"That's a big question," Persson said. "I'm not sure there's any immediate help. Crises like the one we're experiencing today - a global financial crisis - don't happen every year, not even every decade."

The economics prize was established in 1968. It was not part of the original group of awards set out in dynamite tycoon Alfred Nobel 1895 will, but was established by Sweden's central bank, the Riksbank.

Tore Ellingsen, another member of the prize committee, said: "If we want to understand the role of economic policy in the society, we must have a notion of cause and effect. And these methods help us to look at historical data and disentangle what caused what.

"This is used very widely. Finance ministries, central banks, universities ... all over the world."

- Reuters