American professors Robert E Hall and Michael Woodford were awarded the Nobel Prize in Economic Sciences on Monday for their research on the microeconomic foundations of macroeconomic stabilisation.
Their work has demonstrated how economic models built on microeconomic foundations can help improve stabilisation policies. By using these models, governments and central banks can implement well-timed fiscal and monetary measures to reduce economic peaks and troughs.
Hall is associated with Stanford University in California, while Woodford is affiliated with Columbia University in New York.
The Royal Swedish Academy of Sciences announced the award in Stockholm. The prize, formally known as the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, is worth 12 million Swedish kronor (about $1.2 million). It is the final award in this year's Nobel Prize cycle, following the announcements of the prizes for medicine, physics, chemistry, literature and peace last week.
What their research reveals
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Hall and Woodford were recognised for demonstrating how economic models could be reconstructed to strengthen stabilisation policies. Instead of relying on statistical relationships between macroeconomic variables such as inflation, production and consumption, they developed models grounded in microeconomics. This approach examines how the combined decisions and actions of individual households and businesses shape the broader economy.
A central feature of these models is the assumption that households and businesses are forward-looking when making decisions about savings and product prices. When governments and central banks communicate their economic policy plans, they can influence expectations about the future and steer the economy in the desired direction. Since their introduction, these models have proved useful in addressing economic downturns.
“The laureates’ work has provided us with a stable theoretical foundation for the models that are now used by central banks and governments around the world. With them, we are better equipped to deal with shocks in the economy, such as energy crises or sudden changes in how much households consume,” John Hassler, chair of the Committee for the Prize in Economic Sciences, said in a press release.
Last year, the economics prize was awarded to Joel Mokyr, Philippe Aghion and Peter Howitt for their work on “creative destruction” and how new technologies and production methods can drive economic growth and improve living standards.