This year’s prize was about “expectations”, said Staffan Normark, the permanent secretary of the Swedish Royal Academy of Sciences in a press conference announcing the award.
Sargent, based at New York University, and Sims, a professor at Princeton University, have together developed ways for better analyzing and understanding “the causal relationship between economic policy and different macroeconomic variables such as GDP, inflation, employment and investments”, the Academy said in a statement.
Sargent’s and Sims’ research helps increase understanding of the “two-way relationship” between policy and the economy by examining the role of expectations.
“Expectations regarding the future are primary aspects of this interplay,” the Academy 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.”
Methods developed by the two economists can help identify the causal relationships between policy and actors in the economy, thus making it possible to explain the role of expectations and “ascertain the effects of unexpected policy measures as well as systematic policy shifts”.
Sargent has shown how “structural macroeconometrics” can be used to analyze permanent changes in economic policy, while Sims developed a method based on ”vector autoregression” to analyze how economies are affected by temporary changes in economic policy and other factors.
While Sargent and Sims carried out their research independently, their contributions are complementary in several ways, according to the Academy.
Much of their important work from the 1970s and 1980s has been adopted by both researchers and policymakers around the world and the tools they developed are considered to be “essential” in macroeconomic analysis.
Sims, who participated in Monday’s press conference via telephone, said he had not expected to win the Nobel.
He was later asked how his methods could be used to deal with the world’s current economic crisis.
“If I had a simple answer to that I’d spread it across the world,” he said.
“I have no simple answer, but I think that the methods that I’ve used are central for pulling us out of this mess.”