Economics Nobel awarded for work on stabilizing economies in crisis

The 2026 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel has been awarded to economists Robert E. Hall and Michael Woodford for their research on how to stabilize an economy to avoid socially and economically damaging fluctuations in inflation, growth and employment.

The work, in the words of the prize awarding committee, “generated a paradigm shift in stabilisation policy and [is] now used by central banks and finance ministries around the world”.

“This is an excellent prize, honouring two superb and highly influential economists,” says economist John Cochrane of the Hoover Institution, a thinktank based at Stanford University. Olivier Blanchard, formerly chief economist at the International Monetary Fund, says the laureates have “dramatically changed the conduct of monetary policy”.

According to Cochrane, there were “a dozen plausible contenders at least” to share a prize in this field. “I would hate to be the Nobel Prize committee deciding which two or three to recognize”, he says, but “Hall and Woodford were top contenders on anyone’s list”.

Speaking by phone during the prize announcement, Woodford said he was “elated” by the award. He added that his theory was intended not just to guide policy but also to help governments explain to the public why they make economic interventions in the way they do, “to talk to people about why the things that are being done are being done”.

“Together, Hall’s and Woodford’s contributions amount to a new foundation for the theory of macroeconomic fluctuations”, say the Nobel committee, “allowing us to obtain a deeper understanding of the sources and propagation mechanisms behind recessions and booms.”

The return of Keynes

The work of the two laureates, who share the prize of 12 million Swedish kronor (around $1.2 million), builds on the ideas of the twentieth century British economist John Maynard Keynes.

Keynes argued that governments need to intervene on a big scale in times of economic instability to avoid crashes and mass unemployment as happened in the Great Depression of the 1930s. Market forces alone cannot give an economy sufficient agility to respond to such crises, he contended in books such as How to Pay for the War, published just after Britain had declared war against Nazi Germany (Macmillan, 1940).

Keynes’ ideas became highly influential from the mid-20^th-century onwards. They were relevant as recently as the COVID-19 pandemic when governments around the world funded businesses so they could retain their staff during lockdowns. But these ideas did not prevent the rollercoaster of economic boom and bust, evident for example in the oil crisis of the 1970s, and the financial crisis of 2008.

Hall and Woodford effect

Hall and Woodford’s work has helped to explain what was missing in Keynes’ macroeconomic picture – the study of the economy as a whole – by diving deep into the microeconomic perspective, which considers how decisions made by individual businesses and households affect prices, earnings, and spending.

Hall, based at Stanford University in California, recognized that people’s decisions about consumption depend not just on quantifiable factors such as earnings but on what Keynes himself called “animal spirits”: psychological factors that drive economic choices, in this case expectations about the future.

In two key papers, in 1978 and in 1982, Hall showed that it is possible to estimate the proportion of spenders who take a rational view of how they think future monetary and fiscal policies might change, as well as those who in contrast make their decisions about consumption based only on an immediate, gloomy prospect of having no savings or access to borrowing. In effect, this amounts to estimating the proportions of the population that are forward-looking in their spending decisions and that are not. Hall validated his predictions against real-world data on consumption.

Woodford, based at Columbia University in New York, built on such work about expectations to create a 'New Keynesian' microeconomic theory, which culminated in his book Interest and Prices: Foundations of a Theory of Monetary Policy (Princeton University Press, 2003).