Monday, October 10, 2011

Thomas Sargent and Christopher Sims Share Nobel Prize in Economics

This is a surprise considering the current economic circumstances. Sargent and Sims are both macro-economists, and if the global financial crisis has taught us nothing else, it is that the state of our current models of the macro-economy, however formally consistent and mathematically elegant, are not up to the tasks of predicting, explaining, or providing solutions to the problems we are confronting today.

I don't know much about Sims' work, but Sargent is best known for his important and influential contributions to the rational expectations model, which adds to the irony of today's prize announcement because that  model holds that individuals possess the capacity to foresee and rationally predict future circumstances and that their predictions are largely accurate. Many social scientists have raised profound questions about the rational expectations model, and empirical evidence does not appear to support it. Already, rational expectations seemed to be in retreat back in 1995, when Robert Lucas, one of its originators, won the Prize. The recent financial crisis has done little to enhance its reputation.

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