Today, the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel (yes, this is the long and formal title for the Nobel in economics), was awarded to Thomas J. Sargent and Christopher A. Sims. The following caption summarizes the motivation:
“for their empirical research on cause and effect in the macroeconomy”
The longer motivation, and survey of the recipients’ academic contributions, can be found here (pdf 600 Kb).
As a macroeconomist, I can only support this choice. These are definitely two of the profession’s “grand old men”, and it is difficult to write a modern paper without citing either of them, or both. Their influence in theoretical and empirical macroeconomics has been, and is, enormous, and in these days where macroeconomists by many camps are considered technocrats out of touch with reality, it is particularly nice to see that the prize is awarded for Sargent and Sims’ contributions to empirical macroeconomics.
The VAR evidence hiding in any economy, as Sims has directed us to, is what any theoretical modeller must seek to match. And the structural empirical models that Sargent has suggested, is what we need to put up, if we want to understand why an economy acts like it does and how it reacts to different policy measures.
So, as the committee emphasizes, two complementary approaches to empirical macroeconomics are being honored. And for those who continue to believe that macroeconomists are fools believing that rational expectations are everywhere a realistic description of economic behavior, it is ironic (in a positive sense) that both laureates have made progress in developing models featuring non-rational expectations. They have done this for decades, but critics of modern macroeconomics, of course, don’t bother reading.
Congratulations to Sargent and Sims!