**1943-**

**During the 1970s the pioneering work of the** American economist Thomas Sargent focused on the implications of rational expectations for econometric research and policymaking. Expectations about the future are a key ingredient of economic decision making, and over the years economic theory has employed different models of expectations formation. The rational expectations hypothesis, initially formulated by John F. Muth Jr. in 1961, swept through macroeconomics during the 1970s. Robert Lucas Jr. and Thomas Sargent, in their 1972 and 1973 articles, led this revolution. The 1981 book by Lucas and Sargent reprints much of the key early literature, while a complete bibliography of Sargent’s works can be found in his 2005 interview with George W. Evans and Seppo Honkapohja.

**Sargent exposed** difficulties in standard procedures and showed how to formulate and conduct valid tests of central macroeconomic relationships under the rational expectations hypothesis. His contributions in this area include studies of the natural rate of unemployment, monetary neutrality of real interest rates, dynamic labor demand, hyperinflation, and tests for the neutrality of money in "classical" models. In the 1980s Sargent developed new econometric methods for estimating rational expectations models, which were presented in his 1980 and 1982 articles with Lars Hansen.

**As put forward in articles with Neil Wallace in 1973 and 1975**, Sargent also made several key contributions to theoretical macroeconomics, including the saddle-path stability characterization of the rational expectations equilibrium and the policy ineffectiveness proposition for monetary policy. His 1979 graduate textbook integrated these insights into an approach that viewed macroeconomic equilibrium as a dynamic, stochastic process. In later work Sargent continued to extend the rational expectations approach into new areas. Two prominent examples are his 1981 study, with Wallace, of the implications of the government budget constraint for inflation and his 1998 study, with Lars Ljungqvist, of the sources of the European unemployment problem.

**Sargent’s contributions have not been confined** to the development and application of the rational expectations paradigm. The standard formulation of rational expectations makes the strong assumption that economic agents have so much information that their forecast errors are just random noise. Sargent’s interest in the theoretical foundations of rationality led him in the 1980s to join a line of research called learning theory. In this approach, agents have an imperfect understanding of the economy and try to improve their knowledge over time. Albert Marcet and Sargent’s 1989 article showed, in a general setting, that econometric learning could converge to rational expectations equilibrium when certain conditions are satisfied. Sargent’s 1999 book called attention to the possibility of "escape routes," that is, occasional large deviations from an equilibrium, and led to a surge of interest in persistent learning dynamics. The 1993 book by Sargent and 2001 book by George Evans and Seppo Honkapohja provide, respectively, an overview and a full treatise on learning and expectations formation in macroeconomics. Closely related to the research on learning are issues of robustness and model uncertainty, to which Sargent has made key contributions, including his book with Hansen in 2003 and with Hansen and Thomas Tallarini in 1999.

**In addition** to the great intellectual depth and wide range of the contributions outlined above, Sargent has also done important research in economic history. Examples are his 1985 study on episodes of moderate and rapid inflations and his 2002 study, with Francois Velde, on monetary standards. Sargent discusses the different facets of his research in a 2005 interview with Evans and Honkapohja.