How to Distinguish Cause and Effect? (2011 Nobel Memorial Prize in Economics)

The paper discusses the contribution of 2011 Nobel laureates, Thomas Sargent and Christopher Sims, to economics. It is shown how these two economists proposed to analyze causal relationships in macroeconomics. The common idea of the two laureates is that one should not look for isolated empirical relationships; rather, one should seek theories, which are capable of explaining the observed regularities, and then subject the whole theories to empirical tests. However, the specific methods proposed by the two economists differ. Thus, Sargent proposed to test a specific model; Sims, on the other hand, introduced the method called structural autoregression, in which an econometric model is subjected to a minimal set of theoretical restrictions encompassing a large set of theoretical models. Then the paper discusses applications of this logic to different situations.