A day of examining fiscal policy ended with celebration for two scholars whose research led to the insights and tools to analyze such policy: the 2011 Nobel laureates in economics, Thomas J. Sargent and Christopher Sims.
Sargent and Sims were honored at a dinner at the Becker Friedman Institute’s Fiscal Policy Under Fiscal Imbalance conference. Sargent, a Distinguished Fellow at the Institute, co-organized the conference with Marco Basseto of the Federal Reserve Bank of Chicago. Sims, Harold H. Helm ’20 Professor of Economics and Banking at Princeton University, took part in the closing panel on the fiscal theory of the price level―a concept he played a key role in developing.
Six more Nobel laureates were among the friends, former students and colleagues gathered for dinner at the Quadrangle Club to toast Sims, Sargent, and their seminal contributions to time-series econometrics and macroeconomics.
Institute Research Director Lars Peter Hansen told the crowd that as a student and research assistant to both Sims and Sargent at the University of Minnesota in the 1970s, he had a front-row seat to the path-breaking work they produced.
“They were unique in the way that they used economic models along with time-series data to analyze important policy questions,” Hansen said. Their insights “came only with rigorous economic modeling and careful empirical analysis.”
Work by Sims and others who used his methods challenged the standard monetarist view of macroeconomic policy and its impact on the economy, Hansen said. Sims’s empirical analyses produced economic models that showed how fiscal policy and its interaction with monetary policy―rather than monetary policy alone―determine price levels and inflation.
That is just one example of Sims’s impact, Hansen added. “His work is widely used in policy research from governmental agencies.”
Hansen, who frequently collaborates with Sargent, said of his colleague, “Sargent’s approach to research questions has been diverse and eclectic, continually searching and finding insight tools for interpreting economic time series. Tom has complemented his empirical work with the willingness to explore an astonishing range of issues through historical analysis. He has examined European hyperinflations and strategies that nations have historically used to finance wars—questions with important implications for policy.
“I salute and offer a toast to Sargent and Chris, and encourage them to keep on inspiring us,” Hansen concluded.
Robert Lucas, whose Nobel prize-winning work on rational expectations motivated Sargent’s work in particular, recalled papers he wrote with Sargent and others critiquing inadequate views of how expectations were formed and worked.
“We knew what we were talking about, we created a stir, and people listened,” said Lucas, the John Dewey Distinguished Service Professor in Economics. However, Lucas added, these critiques did not lead all the way to better models, and the work could have ended there. “I feel like Tom singlehandedly stepped up. He saw the only way to move forward was to write down models of the same scope and ambition.
“Chris proposed the idea of time-series econometrics. This turned a corner,” Lucas continued. “There were plenty of critics of the model, but you could build on this stuff and move forward,” said Lucas, pointing to what resulted in “a whole vigorous culture of macro-model building that has grown up since, with huge variety. When I look back, it’s a good thing Tom and Chris came along when they did.”
By Toni Shears, Becker Friedman Institute for Economic Research
—Prof. Kunle Odunsi
