Economists Do It With Models

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Announcing Your 2011 Sveriges Riksbank…@#$! It, Your 2011 Nobel Prize Winners In Economics…

October 10th, 2011 · 1 Comment
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So I tried to get up early this morning for the Nobel announcement, and I succeeded…if by “succeeded” you mean “went to the Nobel web site, muttered ‘heh, interesting’ and then fell back asleep.” The official word is that Thomas Sargent of NYU and Christopher Sims from Princeton have won the 2011 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.

And yes, it’s actually called that. Some background, in case you are not familiar:

Every year since 1901 the Nobel Prize has been awarded for achievements in physics, chemistry, physiology or medicine, literature and for peace. The Nobel Prize is an international award administered by the Nobel Foundation in Stockholm, Sweden. In 1968, Sveriges Riksbank established The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, founder of the Nobel Prize.

Sooo…profs Sargent and Sims…according to the Nobel committee, they won the prize for their (independent) work on “empirical research on cause and effect in the macroeconomy.” In other words, they seem to be trying to come up with actual empirical evidence on whether policies really work like various factions of theoretical hand-waving macroeconomists claim that they do. I can certainly get behind that. So what specifically do these guys do?

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.

You can also read more about what each of these guys did specifically here. Interestingly, Sargent and Sims only worked on one paper together (back in 1977), but their academic paths have very much run in parallel- both have studied at UC Berkeley, both got their Ph.D’s from Harvard (and were classmates, in fact), both ended up at the University of Minnesota, and these guys are now co-teaching a class at Princeton. I wonder which one thinks the other is totally single-white-famaleing him. Also, I never thought I would be envious of Princeton students, but here we are. 🙂

In case you are feeling some Columbus Day reading material, you can see a bunch of relevant links here. As for the Nobel pool, I am told that Harvard shut it down for legal reasons. I suppose it’s for the best, since your bets for Richard Thaler would have just cost me money.

UPDATE: I got carried away and wrote an entire article on the different prestigious awards that economists can hope to receive. I’m expecting mine to arrive in the mail any day now.

ANOTHER UPDATE: In case you prefer your Nobel news in limerick form
The committee bestowed some respect
On the science of cause and effect
With a new Nobel prize
For a couple of guys
Who proved that it’s hard to project.

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1 response so far ↓

  • 1 Eat The Babies! // Oct 11, 2011 at 11:15 am

    I’ve heard a lot about what their research is meant to do, but I’ve not heard anything about how well their models do it. When you look back on what their models predict, are they accurate?

    Just because lots of people use them is meaningless to me. Lots of people used a risk calculator while cutting CDO deals leading up to the banking crisis, and that obviously meant they weren’t that great (okay… I know… I know… they really were pretty accurate, folks just didn’t understand what they predicted, but still…)

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