Nobel Prize – Expectations

The Nobel Prize in Economics for 2011 has been given to Thomas Sargent and Christopher Sims for their work on how central bank policy shapes an economy dynamically. There’s always a bit of politics in this Nobel Prize, and this year is no different. The two recipients more or less proved that economics can be used for a central bank, and even a government, to shape the future. Expectations guide how people make decisions, and they aren’t always rational.

If that sounds obvious, it’s partly because we’re living in a world that these two helped define. It helps to take a step back to a time when economics was inherently backward looking, going over old data as it comes out and adjusting to meet the world that was measured a month or several ago.

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