Thomas Sargent, a professor at New York University, and Christopher Sims, a professor at Princeton University won the Nobel economics prize on Monday.
The two Americans, working independently, researched the cause-and-effect relationship between the economy and policy instruments, such as interest rates and government spending.
Even though the research was conducted in the 1970s and '80s, it is relevant today as world government and central banks seek ways to avoid another recession.
The Royal Swedish Academy of Sciences said the winners developed methods for answering questions such as how economic growth and inflation are affected by a temporary increase in the interest rate or in a tax cut. The Academy added that Sargent has helped gain understanding of systematic policy shifts, while Sims has focused on how shocks spread through the economy.
"It is not an exaggeration to say that both Sargent's and Sim's 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 Associated Press.
But Sims said there was no easy fix for the current financial turmoil. "I don't have any simple answer," he said, "I think they point a way to try and unravel why our serious problems develop and new research using these methods may help us lead us out of it."
Sargent is teaching this semester at Princeton. In fact, the two Nobel winners are teaching a course together at Princeton this semester. Sims joked that he and Sargent don't work together. Instead, they have a "series of ongoing arguments" about details of approaches to economics.
The two will each get half of the 10 million kronor ($1.5 million) in December.
With the Associated Press