Our congratulations to Thomas J. Sargent, who shares this year’s Nobel Prize in Economics with Christopher A. Sims for their empirical research on cause and effect in the macroeconomy. In 1987 we published Sargent’s Dynamic Macroeconomic Theory, along with its companion volume, Exercises in Dynamic Macroeconomic Theory, which was written with Rodolfo E. Manuelli. Our Lindsay Waters, who acquired those books for HUP, had previously published both Sargent and Sims while at the University of Minnesota Press.
The Nobel press release describes Sargent’s work:
Thomas Sargent has shown how structural macroeconometrics can be used to analyze permanent changes in economic policy. This method can be applied to study macroeconomic relationships when households and firms adjust their expectations concurrently with economic developments. Sargent has examined, for instance, the post-World War II era, when many countries initially tended to implement a high-inflation policy, but eventually introduced systematic changes in economic policy and reverted to a lower inflation rate.
And, further explanation via the Nobel website:
What happens in the macroeconomy when monetary policy systematically follows a Taylor rule, i.e., when the interest rate responds to changes in inflation and the business cycle in a pre-determined pattern? Or what happens if a central bank is instead given a mandate to maintain inflation close to two percent? Sargent’s analysis deals with the effects of such systematic policy rules and the consequences of changes in the rules for policy. Expectations are an integral part of this analytical approach.
Is it possible to determine whether changes in the economy depend on shifts in economic policy? Could such changes instead depend on fluctuations in the overall economy that prompt decision-makers to adopt a different policy? Sargent has examined these issues using a three-step method.
His first step involves developing a structural macroeconomic model, i.e., an accurate mathematical description of the economy. A number of parameters, which determine the relationships among different variables, are introduced into the model. For instance, if we know that consumers’ aggregate demand for goods and services is affected by the expected real interest rate, this relationship should be incorporated in the model. The parameters governing such basic relations should not be affected by the changes in economic policy. This includes preference parameters, which describe how individuals choose between saving and consumption depending on interest rates and income.