STEVE INSKEEP, HOST:
Let's talk about the two Americans who have won the 2011 Nobel Prize for economics. They are Princeton's Christopher Sims and Thomas Sargent of New York University. We're going to talk about them with NPR's Jim Zarroli. Jim, good morning.
JIM ZARROLI, BYLINE: Good morning, Steve.
INSKEEP: OK, the Nobel committee says these men had developed essential tools for understanding how shifts in government policy affect economic growth. Sounds pretty timely.
ZARROLI: Yes, it is. The Nobel committee generally says that they don't consider, you know, current events. What's happening now in the economy when they decide whom to give the award to, but, of course, this is a time when so much is happening in the economy, it's almost hard not to find something that's relevant.
INSKEEP: So what did Sims and Sargent add to our understanding of the broader economy and how government can tweak it?
ZARROLI: Well, one of the problems in understanding how the economy acts is that you have both anticipated and unanticipated events. In order words, you have something like an earthquake or an election; something that nobody sees coming. They affect the economy.
But then you also have kind of longer-term, more gradual policy shifts by government and by central banks, like the Fed. They tend to take place over a longer period of time. The question for economists is how do you separate out the two? So these men have been instrumental, really, in developing models that try to figure out how these different factors interact.
INSKEEP: David Wessel of The Wall Street Journal, regular guest in this program is tweeting around an article about Sargent that points out that some of his work has tried to take human nature into account. How is it that people respond to those kinds of major events that you're talking about, whether it's an election or a tax cut or something like that? And what kinds of plans do they make and how do those millions of individual decisions work out through an economy?
ZARROLI: Yeah. And that's true. This is research that can be used in a lot of different ways. For instance, how does a change in interest rate policy affect the economy over time? That's a complicated question because there is this issue of anticipation. In other words, if people expect the rates to go up, that's going to have an impact on what they do. You know, maybe they decide to refinance their homes now, rather than wait till later, 'cause they think the interest rates are going to go up. So, expectations complicates things. In other words, yeah, do prices come down because interest rates have gone up? Or do prices come down because people expect they will?
So, these men tried to figure out how this works. And the models they developed have really helped economists begin to understand that. They've really been indispensable in understanding sort or some of the way the economy works.
INSKEEP: Going to be interested to hear. I'm sure they'll be interviewed in the days ahead; maybe right on this program, if we're lucky. I'm going to be interested to hear what these men say about the situation we're in now. We just went through this summer, in which it seemed that millions of people did not know what to expect. People seemed not to know which way the economy was heading.
ZARROLI: Yeah, that's right. And policymakers will be watching what they say, too. Their work has been very closely followed by central bankers, for instance. They use this to figure out, you know, what will happen if they raise or lower rates? How long it will take.
Christopher Sims, for instance, figured out that when you raise interest rates by a certain amount, it has an immediate effect on the growth rate, on gross domestic product, which lasts for several quarters. It also has an effect on prices, but that takes, you know, a while longer. So he was able to shed some light on how this works and his work has been instrumental in helping central banks figure out what they should do.
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INSKEEP: OK. Thanks very much. NPR's Jim Zarroli on Nobel Prize winners in economics, Christopher Sims and Thomas Sargent. It's MORNING EDITION from NPR News. Transcript provided by NPR, Copyright NPR.
