drifting coefficients and drifting volatilities. Tim and I are striving to sort these
things out, and so are Chris and Tao Zha and Fabio Canova.
Economic History
Evans and Honkapohja: Your papers on monetary history look very
different than your other work. Why are there so few equations and so little
formal econometrics in your writings on economic history? Like your ‘Ends
of Four Big Inflations’ and your paper with Velde on features of the French
Revolution? We don’t mean to insult you, but you look more like an ‘old
economic historian’ than a ‘new economic historian’.
Sargent: This is a tough question. I view my efforts in economic history
as pattern recognition, or pattern imposition, exercises. You learn a suite of
macroeconomic models that sharpen your mind by narrowing it. The models
alert you to look for certain items, e.g., ways that monetary and fiscal policy are
being coordinated. Then you read some history and economic history and look
at a bunch of error-ridden numbers. Data are often error-ridden and incomplete.
You read contemporaries who say diverse things about what is going on, and
historians who put their own spins on things. From this disorder, you censor
some observations, overweight others. Somehow, you impose order and tell a
story, cast in terms of the objects from your suite of macroeconomic theories.
Hopefully, the story rings true.
Evans and Honkapohja: Do you find rational expectations models
useful for understanding history?
Sargent: Yes. A difficult thing about history is that you are tempted
to evaluate historical actors’ decisions with too much hindsight. To understand
things, you somehow have to put yourself in the shoes of the historical actor and
reconstruct the information he had, the theory he was operating under, and the
interests he served. Accomplishing this is an immense task. But our rational
expectations theories and decision theories are good devices for organizing our
analysis. By the way, to my mind, reading history immediately drives you away
from perfect foresight models toward models in which people face non-trivial
forecasting problems under uncertainty.
Evans and Honkapohja: Interesting. But you didn’t answer our ques-
tion about why your historical work is more informal than your other work.
Sargent: I don’t know. Most of the historical problems that I have worked
on have involved episodes that can be regarded as transitions from one rational
expectations equilibrium to another. For example, the ends of hyperinflations;
the struggles for new monetary and fiscal policies presided over by Poincare and
Thatcher; the directed search for a new monetary and fiscal constitution by a
sequence of decision makers during the French revolution; the eight hundred
year co-evolution of theories and policies and technologies for producing coins
in our work with François on small change. I saw contesting theories at play
in all of these episodes. We didn’t see our way clear to being as complete and
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