STOCKHOLM, Oct. 13 (Xinhua) -- The 2026 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel was awarded to American economists Robert E. Hall and Michael Woodford for their decades of work developing models that have helped governments and central banks manage economic shocks.
In its announcement on Monday, the Royal Swedish Academy of Sciences credited the two economists with laying "microeconomic foundations of macroeconomic stabilization."
"The laureates have helped us smooth out the economy's peaks and troughs," the academy said in a statement, adding that their work had "significantly improved" policymakers' ability to implement well-timed fiscal and monetary measures.
WHAT THEY FOUND
Hall, a professor at Stanford University, and Woodford, a professor at Columbia University, helped reshape macroeconomic modelling by grounding it in microeconomics.
Rather than relying solely on statistical relationships between broad economic indicators such as inflation, output and consumption, their approach examines how the decisions and expectations of households and businesses shape the wider economy.
In a 1978 paper, Hall examined how household consumption decisions are shaped by expectations about future economic conditions. His work helped establish the microeconomic foundations for understanding consumption, while Woodford's research on firms' price-setting behaviour helped bring the demand and supply sides together in a framework for macroeconomic stabilization.
Together, their work contributed to the development of New Keynesian models, which provide a framework for analysing how households and businesses respond to economic conditions and how monetary policy affects economic activity.
"Robert Hall worked on the demand side, studying consumption, whereas Michael Woodford studied the supply side, the price-setting behaviour of firms, and put all the pieces together in a whole," Timo Boppart, a professor at Stockholm University and a member of the prize committee, was quoted by the Financial Times as saying.
The academy said it was recognizing the pair for bringing about "a paradigm shift in stabilization policy." The prize is worth a combined 12 million Swedish kronor (about 1.2 million U.S. dollars).
"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," said John Hassler, chair of the Committee for the Prize in Economic Sciences.
Because of their research, "we are better equipped to deal with shocks in the economy, such as energy crises or sudden changes in how much households consume," he added.
WHY IT MATTERS
The award comes at a time of heightened geopolitical uncertainty and a fragile global economy, with frequent shocks posing persistent challenges for policymakers.
"Your research on economic stabilization has greatly improved our understanding of people's economic decisions and strengthened the foundations for effective policy," Christine Lagarde, president of the European Central Bank, wrote in a note of congratulations to the economists on social media.
For decades, governments have sought to cushion economic shocks by following the prescriptions of British economist John Maynard Keynes, whose ideas gained prominence during the Great Depression. Cutting taxes and increasing government spending can stimulate demand by encouraging households and businesses to spend and invest, helping revive economic growth.
The oil shocks of the 1970s, however, posed a major challenge to existing economic thinking. Many Western economies experienced high inflation alongside high unemployment, while growth remained weak. The combination raised doubts about the effectiveness of established approaches to economic stabilization.
This year's award winners brought renewed relevance to economic stabilization theory, showing how a better understanding of real-world economic behaviour can help explain the effects of policy decisions.
Their research also helped shape the theoretical basis for forward guidance, a policy tool through which central banks signal their expectations for future interest rates. The approach gained prominence in the wake of the 2008 financial crisis.
"That was an important part of the policy response in the years from 2009 onward, and I think it did contribute to better stabilization," Woodford told the committee by phone from New York.
He added that one of the main themes of his work was helping policymakers appreciate the importance of understanding individuals' behavior in the market: How they make decisions about spending and what they understand about future economic policy. ■