Monday, October 10, 2011
Thomas J. Sargent and Christopher A. Sims Win the Nobel Prize for Economics
Rational Expectations and the Ability to Distinguish Cause and Effect Empirically
Macroeconomics has long been the theology of economics. Sargent and Sims tried to take the common sense reality that it is what people expect in the future, not what we currently observe, that drives their decisions. They developed a type of econometrics (the statistical modeling of economic reality) that would deal with expectations. In the process they transformed macroeconomics, generally for the better. This morning the Nobel Prize committee announced they won the Nobel Prize in Economics.
Today central bank credibility is central to economists' thinking about monetary policy. Guess why.