Princeton University professor Christopher Sims has been awarded the 2011 Nobel Prize in economics along with Thomas Sargent, a New York University economist who is a visiting professor at Princeton, for developing tools to analyze the effect of monetary policy on the economy.
Sims and Sargent were honored with the Nobel Memorial Prize in Economic Sciences for their work in answering “questions regarding the causal relationship between economic policy and different macroeconomic variables such as GDP (gross domestic product), inflation, employment and investments,” the Royal Swedish Academy of Sciences noted in announcing the award today.
“Economic policy decisions are influenced by expectations about developments in the private sector,” the Nobel announcement said. “The laureates’ methods can be applied to identify these causal relationships and explain the role of expectations. This makes it possible to ascertain the effects of unexpected policy measures as well as systematic policy shifts.”
Sims, who is Princeton’s Harold H. Helm ’20 Professor of Economics and Banking, has been a faculty member at Princeton since 1999.
“I was very surprised,” Sims said this morning about receiving the notification of the award. “We jumped right out of bed, because we imagined it would be a very busy morning,” he said, adding that at first his wife couldn’t find the talk button on the phone when the Nobel representatives contacted him “so they called back 10 minutes later.”
Noting that there have been many other people who have contributed to his areas of research, he said, “I think anyone who gets the Nobel Prize has to be a little bit embarrassed to be picked out when there have been so many people who have contributed.”
Sims has developed statistical tools that have been useful in unraveling the effect of monetary policy on the economy.
“These methods have been used in many countries, and one of the things that have given them credibility is they tend to give consistent results,” he said. “The most extensive applications have been by central banks that are trying to work out the effects of monetary policy.”
“Monetary policy tries to control inflation, and as a result interest rates tend to be high when inflation is high,” he said. “But we think that raising interest rates lowers inflation. The main contribution of this work is to provide a way to untangle the relationship between interest rates and inflation, so we can see what the effect of interest-rate policy changes are on the price level and inflation, and separate that from the reverse causality that makes central banks react to inflation by changing interest rates.”