Thomas Sargent and Christopher Sims
Citation: For their empirical research on cause and effect in the macroeconomy.
The key idea
Sargent: rational-expectations equilibrium estimation gives us a way to recover structural parameters from data. Sims: vector autoregressions and impulse-response functions reveal causal patterns in macroeconomic data without imposing strong theoretical priors.
The explanation
Sargent's structural VAR methodology combined Lucas's rational expectations with maximum-likelihood estimation of macroeconomic models. Sims's 1980 'Macroeconomics and Reality' showed that traditional structural macroeconometrics imposed incredible identifying restrictions and proposed VARs as a more honest alternative.
Why Africa should care
VAR models are the workhorse of African macroeconomic forecasting at central banks and the AfDB. The impulse-response analysis used to debate monetary policy transmission in Kenya, Nigeria, and South Africa is in the Sims tradition. Sargent's structural estimation is used in calibrating African DSGE models at the IMF.
How to use it
When a policy debate involves 'what happens if we raise the policy rate by 100bp?', request the impulse-response function from a credible VAR. The function's shape matters as much as its peak.
Canonical works
- Christopher A. Sims (1980) "Macroeconomics and Reality" Econometrica
- Thomas J. Sargent (1979) "Macroeconomic Theory" Academic Press
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