Two Americans Win Economics Nobel for Showing How to Steady Economies in Shocks

Two American economists, Robert E. Hall of Stanford University and Michael Woodford of Columbia University, won this year’s Nobel prize in economics on Monday for work that helps governments and central banks respond to sudden shocks such as energy crises and bursts of inflation. The Royal Swedish Academy of Sciences announced the award in Stockholm, citing their research on the “microeconomic foundations of macroeconomic stabilisation.”

The committee said the pair’s work “generated a paradigm shift in the theory of stabilization policy” by moving economic analysis from a bird’s-eye view of the whole economy down to the decisions of individual households and businesses. “The laureates have helped us smooth out the economy’s peaks and troughs,” the academy said.

Their research grew out of a failure of older thinking. Policymakers once assumed a simple, stable trade-off between unemployment and inflation, an approach that could not explain the 1970s, when both rose at the same time. “This is the Keynesian recipe and it worked well, until it didn’t,” said Timo Boppart, a member of the prize committee.

Hall, 83, studied how consumer spending depends on what people expect to earn in the future, not just on what they earn today. In a 1982 paper with Frederic Mishkin, he found that about 80% of households based their spending on those expectations, while the rest lived hand to mouth, the Associated Press reported.

Woodford, born in 1955, showed that businesses set prices based partly on where they expect interest rates to go. That is why, the committee said, central banks should offer “clear and credible communication” about their plans. Committee chair John Hassler said the laureates’ research “has provided us with a stable theoretical foundation for the models that are now used by central banks and governments around the world.” The committee said the work proved valuable during the pandemic and the energy crises of recent years.

Reached by phone in New York, Woodford said, “It’s a tremendous honor, it’s a surprise.” Ivan Werning, an economist at the Massachusetts Institute of Technology, told the AP the prize recognizes research that examines the economy “from the bottom up.”

The laureates share 12 million Swedish kronor, about $1.2 million. Formally called the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel, the economics award is not one of the original Nobel prizes, but it is presented with them on Dec. 10. Hall’s win gives Stanford a second laureate this year, after Karl Deisseroth shared the prize in physiology or medicine.

The award arrives as high energy prices tied to the war with Iran are again testing policymakers, the kind of shock the committee said the laureates’ work helps economies prepare for.