Monday, October 10, 2011

A Nobel Prize For Useless Econometrics

Thomas Sargent and Christoper Sims received the 2011 nobel price in economics. According to the official "information for the public" page from the Nobel web site, they receive it basically for developing new econometric models for estimating the link between economic policy measures and macroeconomic variables like GDP, inflation and unemployment.

The usefulness of such models are highly questionable to say the least because first of all, many of the variables impacting the economy are unknown, and secondly even if somehow this problem was overcome (or ignored), it would at most tell as the link during a particular period of time and place. The response of economic actors to for example tax or interest rate changes will be different in different countries-and different even in the same country during different periods of periods of time. Thus, these models can at most provide economic history, but it can't provide any universal quantitative economic laws because such laws don't exist.

One example of this is how Sims in the application of his model has concluded that monetary policy can't affect price inflation before 1-2 years after its implementation (a conclusion mentioned in the release linked to above). Yet after QE2 was announced and implemented, price inflation started rising pretty much immediately, and within a year had risen from about 1% to nearly 4%.

So I really do not think Sargent and Sims deserve this price. And unfortunately this will promote the excessive use of and over-belief in mathematical models that are making academic economics (particularly the "advanced" courses) in most universities irrelevant for understanding the economy.


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