Thomas Sargent, Nobel Laureate

Most of all, this is a prize about expectations, macroeconomics, and the theory and empirics of policy.  Let’s start with Sargent, noting that I will be updating throughout.

Sargent has made major contributions to macroeconomics, the theory of expectations, fiscal policy, economic history, and dynamic learning, among other areas.  He is a very worthy Laureate and an extraordinarily deep and productive scholar.  Here is Wikipedia on Sargent.  Here is his home page, rich with information. Here is Sargent on  Here is the explanation for both laureates from Sweden.  Here is a Thomas Sargent lecture on YouTube.

He now teaches at NYU, and is a fellow at Hoover, though much of his career he spent at the University of Minnesota.  Sargent is one of the fathers of “fresh water” macro, though his actual views are far more sophisticated than the critics of his approach might let on.  He has done significant work on learning and bounded rationality, for instance.  This is very much a “non Keynesian” prize.

I think of Sargent as a “foundationalist” economist who always insists on a model and who takes the results of that model seriously.  In general he would be placed in the “market-oriented” camp, though it is a mistake to view his work through the lens of politics.

Sargent was first known for his work on rational expectations in the 1970s.  He wrote a seminal paper, with Neil Wallace, on when rational expectations will mean that monetary policy does not matter.  You will find that article explained here, and the paper here.  Expected monetary growth will not do much for output because it does not fool people and thus its nominal effects wash away.

One of his most important (and depressing) papers is Sargent, Thomas J. and Neil Wallace (1981). “Some Unpleasant Monetarist Arithmetic“. Federal Reserve Bank of Minneapolis Quarterly Review 5 (3): 1–17.  The main idea of this paper is that good monetary policy requires good fiscal policy.  Otherwise the fight against inflation will not be credible.  This is probably his most important paper.

He followed up this paper with Sargent, Thomas J. (1983). “The Ends of Four Big Inflations” in: Inflation: Causes and Effects, ed. by Robert E. Hall, University of Chicago Press, for the NBER, 1983, p. 41–97.  This is a masterful work of economic history, showing that monetary stabilizations, from hyperinflation, first required some fiscal policy successes.  I view this as his second most important paper, following up on and illustrating “unpleasant monetarist arithmetic.”

These two papers inspired work from other researchers on a “fiscal theory of the price level,” integrating monetary and fiscal theories.  In Sargent’s view the quantity theory is a special case of a more general theory of asset-backed monies, and for fiat monies the relevant backing cannot be determined without referring to the fiscal stance of the money-issuing government.

His Dynamic Macroeconomic Theory has been an important Ph.d. text for macro.

Sargent also has important work on computational learning, such as Sargent, Thomas J. and Albert Marcet (1989). “Convergence of Least Squares Learning in Environments with Hidden State Variables and Private Information”. Journal of Political Economy 97 (6): 251. doi:10.1086/261603.  A short summary of his work on learning can be found here; I will admit I have never grasped the intuitive kernel behind this work.  I have not read Sargent’s work on neutral networks, you will find some of it here.  It may someday be seen as path breaking, but so far it has influenced only specialists in that particular area.  It is considered to be of high quality technically.  Here is his piece, with Marimon and McGrattan, on how “artificially intelligent” traders might converge upon a monetary medium of exchange; think of this as a modern and more technical extension of Carl Menger.

Here is an old paper with Sims, co-laureate, on how to do macro econometrics with a minimum of theoretical assumptions; this reflected a broad move away from structural models and toward “theory-less” approaches such as Vector Auto Regression.  Here is his introductory paper on how to understand the VAR method.  Sargent’s worry had been that structural models estimate parameters, but then those parameters will vary with policy choices and in essence the economist will be using an “out of date” model.  VAR models are an attempt to do without structural estimation as much as possible, though critics might suggest this enterprise was not entirely successful.

Here is Sargent’s take on the history of the Fed; basically the Fed first had an OK model, then forgot it for a while (the 1970s), then relearned it again.  In July 2010 he penned a defense of the Greenspan-era FOMC, based on the view that they were tackling worst case scenarios.  Here is Sargent’s paper, with Tim Cogley, on what the Fed should do when it does not know the true model.

Circa 2010, in an interview, Sargent defends the relevant of freshwater macro during the recent financial crisis.  While my view is not exactly his, it is a good corrective to a lot of what you read in the economics blogosphere.  This is the single most readable link in this entire post and the best introduction to Sargent on policy and method for non-economists.  The last few pages of the interview have a good discussion of how the euro was an “artificial gold standard,” how it was based on an understanding of the “unpleasant monetarist arithmetic point, and how breaking the fiscal rules has led to the possible collapse of the euro.  Recommended.

He has a very interesting 1973 paper on when the price level path will be determinate, again with Neil Wallace.  Here is his old paper on whether Keynesian economics is a dead end.  Here is his appreciation of Milton Friedman’s macroeconomics.  Here is his recent paper on whether financial regulation is needed, in a context of efficiency vs. stability.  Sargent has toyed with free banking ideas over the decades, casting them in the context of “the real bills doctrine.”  Here is a recent paper on determinants of the debt-gdp ratio.

He is not primarily known for his work on unemployment, but he has a lot of good papers in the area, many of them are listed hereHere he uses layoff taxes and unemployment compensation to explain the behavior of unemployment in Europe over the decades.

His work on “catastrophe,” with Cogley and others, suggests that the equity premium changes with historical memory.

With Velde, Sargent wrote a detailed and excellent book on the history of small change; why was small change scarce for so many centuries?  Hint: the answer involves Gresham’s Law.  There is an MR discussion of this book here.  This book illustrates just how deep Sargent’s learning and erudition runs.

Here are his new papers, Sargent remains very active.

Overall: Sargent really is one of the smartest, deepest, and most scholarly of all contemporary economists.  The word “impressive” resonates.  He has enough contributions for 1.6 Nobel Prizes, maybe more.  He has influenced the thought of all good macroeconomists.  The economic history is dedicated and path breaking.  If I had to come up with a criticism, I find that some of his papers have an excess of rigor and don’t leave the reader with a clear intuitive result.  I am not as enamored of foundations as he is.  Still, that is being picky and this is a very very good choice for the prize.  I would have considered a co-award with Neil Wallace, however, since two of Sargent’s most important papers (JPE 1975) and “unpleasant monetarist arithmetic” were written with Wallace.

Probably I won’t be updating this post any more!


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