Guide to the Nobel laureates in economics

The Nobel prize in economics* was awarded to the macroeconomists Thomas J. Sargent and Christopher A. Sims on Monday. Looking around for a bit of detail on their work I came across Tyler Cowen's annual round up of the Nobels over at Marginal Revolution: 

Let’s go back to the Lucas Critique of 1976. Lucas looked at the large econometric models of the 1970s, models that contained hundreds of variables relating economic aggregates like income, consumption, unemployment and so forth. Lucas then asked whether these models could be used to predict the impact of new policies. One could certainly take the regression coefficients from these models and forecast but Lucas argued that such a method was invalid because the regression coefficients themselves would change with new policies.
If you wanted to understand the effects of a new policy you had to go deeper, you had to model the decision rules of individuals based on deep, invariant or “structural” factors, factors such as how people value labor and leisure, that would not change as policy changed and you had to include in your macro model another deep factor, expectations.
The Nobel for Christopher Sims and Thomas Sargent is for work each did in their quite different ways to develop ideas and techniques to address the Lucas Critique.

There are also good profiles of both Sims and Sargent, including Cowen's trademark one sentence summary of the prize's implications (for Sargent: "Most of all, this is a prize about expectations, macroeconomics, and the theory and empirics of policy"; for Sims: "Basically this is a prize in praise of Minnesota macro, fresh water macro of course, and lots of econometrics.").

* or, officially, The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. Wikipedia has (as usual) a good overview of how the economics prize differs from the rest of the Nobels (something I didn't even know before grad school).

No comments:

Post a Comment