Sargent is one of the leaders of the "rational expectations revolution," which argues that the people being modeled by economists can predict the future, or the probability of future outcomes, at least as well as the economist can with his model. Rational expectations was introduced into economics by John Muth, then Robert Lucas, Jr., and Edward C. Prescott took it much farther. By some works written in close collaboration with Lucas and Neil Wallace, Thomas J. Sargent could fundamentally contribute to the evolution of new classical macroeconomics.
Sargent's main contributions to rational expectations were these:
trace the implications of rational expectations, with Wallace, for alternative monetary-policy instruments and rules on output stability and price determinacy.
help make the theory of rational expectations statistically operational.
Sargent has also been a pioneer in introducing recursive economics to academic study, especially for macroeconomic issues such as unemployment, fiscal and monetary policy, and growth. His series of textbooks, co-authored with Lars Ljungqvist, are seminal in the contemporary graduate economics curriculum.
Sargent has pursued a research program with Ljungqvist designed to understand determinants of differences in unemployment outcomes in Europe and the United States during the last 30 years. The two key questions the program addresses are why, in the 1950s and 1960s, unemployment was systematically lower in Europe than in the United States and why, for two and a half decades after 1980,
unemployment has been systematically higher in Europe than in the United States. In "Two Questions about European Unemployment," the answer is that "Europe has stronger employment protection despite also having had more generous government supplied unemployment compensation"." While the institutional differences remained the same over this time period, the microeconomic environment for workers changed, with a higher risk of human capital depreciation in the 1980s.
Sargent is known as a devoted teacher. Among his PhD advisees are men and women at the forefront of macroeconomic research[who?]. Sargent's reading group at Stanford and NYU is a famous institution among graduate students in economics.
In 2016, Sargent helped found the non-profit QuantEcon project, which is dedicated to the development and documentation of modern open source computational tools for economics, econometrics, and decision making.
Sargent, Thomas J. & Albert Marcet (1989). "Convergence of Least Squares Learning in Environments with Hidden State Variables and Private Information". Journal of Political Economy. 97 (6): 251. doi:10.1086/261603.
Sargent, Thomas J. & Lars Ljungqvist (2000). Recursive Macroeconomic Theory. MIT Press. ISBN978-0-262-12274-0.
Sargent, Thomas J. & Lars Hansen (2001). "Robust Control and Model Uncertainty". American Economic Review. 91 (2): 60–66. doi:10.1257/aer.91.2.60.
^Sargent, T. J. (1977). "The Demand for Money during Hyperinflations under Rational Expectations: I". International Economic Review. 18 (1): 59–82. doi:10.2307/2525769. JSTOR2525769.
^Sargent, T. J.; Fand, D.; Goldfeld, S. (1973). "Rational Expectations, the Real Rate of Interest, and the Natural Rate of Unemployment". Brookings Papers on Economic Activity. 1973 (2): 429–80. doi:10.2307/2534097. JSTOR2534097.
^Sargent, Thomas J. & Neil Wallace (1981). "Some Unpleasant Monetarist Arithmetic". Federal Reserve Bank of Minneapolis Quarterly Review. 5 (3): 1–17.
^Sargent, Thomas J. (1983). "The Ends of Four Big Inflations" in: Inflation: Causes and Effects, ed. by Robert E. Hall, University of Chicago Press, for the NBER, 1983, p. 41–97.