By BEN CASSELMAN And JUSTIN LAHART
Thomas J. Sargent and Christopher A. Sims of the U.S. won the 2011 Nobel Prize in Economics "for their empirical research on cause and effect in the macroeconomy," the Royal Swedish Academy of Sciences said Monday.
The Nobel Prize in Economics was established by Sweden's Riksbank in 1968 to mark the central bank's 300th anniversary. The prize is awarded annually for "work of outstanding importance" in the field of economic science and the winners are selected by the Royal Swedish Academy of Sciences.
Mr. Sargent is perhaps best known for his work in the early 1970s on "rational expectations theory," which argues that people base their behavior not just on government policies but also on what they expect those policies and their impacts to be in the future.
Thus, as the Minneapolis Fed explained in the introduction to an interview with Mr. Sargent last year, central banks "can't permanently lower unemployment by easing monetary policy ... because people will (rationally) anticipate higher future inflation and will (strategically) insist on higher wages for their labor and higher interest rates for their capital."
That work has significant implications now, as central banks around the world grapple with how to boost struggling economies without sparking runaway inflation in the future. One answer, according to another Sargent paper: They can't do it alone. Good monetary policy, Mr. Sargent argued, is impossible without good fiscal policy, a perhaps troubling conclusion at a time when gridlock in Washington has brought fiscal policymaking to a near-standstill.
Mr. Sargent, 68, is now a professor at New York University and a senior fellow at the Hoover Institution, but he did much of his most significant work at the University of Minnesota, where he was a professor from 1971 to 1987. While in Minnesota, Mr. Sargent served as an adviser to the Federal Reserve Bank of Minneapolis. He has also taught at the University of Chicago. Mr. Sargent earned his Ph.D. at Harvard in 1968 and did his undergraduate work at the University of California at Berkeley.
Mr. Sims is best known for his work with methods used to tease statistical relationships out of reams of data. Like Mr. Sargent, he did much of his early work at the University of Minnesota, where he taught from 1974 to 1990. After a stint at Yale, he came to Princeton in 1999 -- one of former Princeton economics department chairman Ben Bernanke's many high-level hires.
In a celebrated 1980 paper, Mr. Sims showed how vector autoregressions -- a statistical technique now widely used by economists -- could be applied to studying changes in the economy.
"He said, let's push statistics as far as we possibly can and figure out what we can pull out of the data and what we cannot," says Middlebury College economist David Colander. "That was a major advance in macroeconomics."
Mr. Sims continued to build on that idea, working on ways to uncover the lines of cause and effect in the economy. In a telephone interview with Swedish television Monday morning, Mr. Sims said that he didn't know how to solve the world's economic problems, but that he thinks the techniques he and Mr. Sargent developed "are central to getting us out of this mess."
The two economists will share a total prize of 10 million Swedish kronor ($1.5 million), the same amount as for other Nobel prizes, to be paid by the Riksbank.
—Charles Duxbury and Niclas Rolander contributed to this article.