STOCKHOLM (AP) — Americans Thomas Sargent and Christopher Sims won the Nobel economics prize on Monday for research that sheds light on the cause-and-effect relationship between the economy and policy instruments such as interest rates and government spending.
Sargent and Sims — both 68 — carried out their research independently in the 1970s and '80s, but it is highly relevant today as world governments and central banks seek ways to steer their economies away from another recession.
The Royal Swedish Academy of Sciences said the winners have developed methods for answering questions such as how economic growth and inflation are affected by a temporary increase in the interest rate or a tax cut.
"Today, the methods developed by Sargent and Sims are essential tools in macroeconomic analysis," the academy said in its citation.
Sargent is a professor at New York University, and Sims is a professor at Princeton University.
The academy cited the two "for their empirical research on cause and effect in the macroeconomy."
Sims told a news conference in Stockholm by telephone that he didn't expect to receive the prize.
"I couldn't be happier to be getting it with my colleague Tom Sargent," he said.
Asked how he would invest his half of the 10 million kronor ($1.5 million) award given the turbulence of today's financial markets, Sims said: "First thing I'm gonna do is keep it in cash for a while and think."
The academy said Sargent showed how "structural macroeconometrics" can be used to analyze permanent changes in economic policy — a method that can be applied to study how households and firms adjust their expectations concurrently with economic developments.
Sims developed a method based on so-called "vector autoregression" to analyze how the economy is affected by temporary changes in economic policy and other factors, like an increase in the interest rate, the academy said.
The economics prize capped this year's Nobel announcements. The awards will be handed out on Dec. 10 — the anniversary of prize founder Alfred Nobel's death. The economics prize is not among the original awards established in Nobel's 1895 will, but was created in 1968 by the Swedish central bank in his memory.