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Americans Thomas Sargent and Christopher Sims won the Nobel economics prize on Monday for research that sheds light on the cause-and-effect relationship between the economy and policy instruments such as interest rates and government spending.

Christopher Sims (left) and Thomas Sargent talk about winning the Nobel Prize for economics during a news conference on Monday at Princeton University in Princeton, New Jersey, United States. - Ap

Sargent and Sims, both 68, carried out their research independently in the 1970s and 80s. But it is highly relevant today as world governments and central banks seek ways to steer their economies away from another recession.

“It is not an exaggeration to say that both Sargent’s and Sims’ methods are used daily … in all central banks that I know of in the developed world and at several finance departments too,” Nobel committee member Torsten Persson told the AP.

The Royal Swedish Academy of Sciences said the winners have developed methods for answering questions such as how growth and inflation are affected by a temporary increase in the interest rate or a tax cut.

“Today, the methods developed by Sargent and Sims are essential tools in macroeconomic analysis,” the academy said in its citation.

Sargent is a professor at New York University, Sims a professor at Princeton.

Sims told a news conference in Stockholm by telephone that there was no easy way in which his work could help resolve the current financial turmoil.

“I don’t have any simple answer, but I think the methods that I have used and Tom has developed are central to finding our way out of this mess,” he added. “I think they point a way to try to unravel why our serious problems develop and new research using these methods may help lead us out of it.”

Sargent told The Associated Press he was surprised by the award, and he hadn’t yet thought of how to celebrate it.

The academy said Sargent showed how “structural macroeconometrics” can be used to analyse permanent changes in economic policy — a method that can be applied to study how households and companies adjust their expectations concurrently with economic developments.

Sims developed a method based on so-called “vector autoregression” to analyze how the economy is affected by temporary changes in economic policy and other factors, like an increase in the interest rate, the academy said.

“Sargent has primarily helped us understand the effects of systematic policy shifts, while Sims has focused on how shocks spread throughout the economy,” the academy said.

The winners developed models to measure the sometimes surprising ways that people respond to changes in economic policy.