Econometric models may seem obscure, but in a recent interview with the Classroom Economist, Nobel Laureate Christopher Sims explained how these models lead to decisions that affect us all.
Sims and colleague Thomas Sargent were awarded the 2011 Nobel Prize for Economic Science for their pioneering work in the field of econometric modeling. These models are important because they help economic policymakers react to the preponderance of data that are available. "New data is coming in every month," Sims explained. "People who make economic policy need to find a way to make sense of that data and use it to guide their decisions."
In particular, Sims and Sargent's work helped settle a prolonged debate between two camps of economists—the monetarists and the Keynesians. As a result, "there's now pretty much a consensus on how monetary policy affects the economy," he said.
Sims also highlighted some differences between European and U.S. policy models, noting that U.S. institutions have several safeguards in place that help prevent a crisis similar to the one Europe faces. For one, he explained, there is no fiscal authority to accompany the European Central Bank, which deprives the member countries of the network of fiscal stabilizers that the United States has.