2 US professors win 2026 Nobel Economics Prize

• US economists Robert Hall and Michael Woodford won the 2026 Nobel Economics Prize on October 12.

• The Royal Swedish Academy of Sciences announced the winners were being honoured “for microeconomic foundations of macroeconomic stabilisation”.

• The Prize, formally known as the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, is the last of this year’s crop of Nobel Prizes.

This year’s winners:

i) Robert E. Hall was born in 1943 in Palo Alto, USA. He got his PhD in 1967 from Massachusetts Institute of Technology, Cambridge, USA. He is affiliated with Stanford University in California.

ii) Michael Woodford was born in 1955 in Chicopee, USA. He got his PhD in 1983 from Massachusetts Institute of Technology, Cambridge, USA. He is affiliated with Columbia University in New York.

• The prize amount, 12 million Swedish kronor, will be shared equally between the laureates.

A paradigm shift in stabilisation policy

• The economy is characterised by alternating downturns and upturns. 

• Ever since the economist John Maynard Keynes launched his theories almost a century ago, stabilisation policy has been important for tackling these fluctuations. 

• During recessions, the economy is boosted by reducing interest rates and increasing the budget deficit, while the opposite should be done to slow a booming economy.

• However, during the oil crises of the 1970s, it seemed that the Keynesian models that govern when and how measures should be implemented no longer worked. 

• They did not reduce unemployment, but led to uncontrolled inflation instead. 

• The West experienced a decade of low growth, high unemployment and high inflation. 

• Many people believed that the stabilisation policy had done more harm than good and that it should be retired.

• Robert Hall and Michael Woodford have developed new macroeconomic models that have significantly improved the ability to implement effective stabilisation policy. 

• On the basis of these models, well-timed fiscal and monetary policy measures can reduce the economy’s peaks and troughs.

• They demonstrated how economic models could be reconstructed to revitalise stabilisation policy. 

• Rather than basing the models on statistical links between macroeconomic variables, such as inflation, production and consumption, they chose to build them on a microeconomic foundation. 

• This encompasses an understanding for how the total mass of individual households and businesses affect the economy through their actions.

• A central component in these models is that households and businesses are forward looking when making decisions about savings or product prices. 

• When governments and central banks communicate their plans for economic policy, they can influence this view of the future and move the economy in the right direction. 

• Since the new models’ introduction, they have been extremely helpful in dealing with the economic downturns.

• Their work has provided us with a stable theoretical foundation for the models that are now used by central banks and governments around the world.