Two U.S. Economists Win Nobel for Models That Help Governments Tame Economic Shocks

Robert Hall of Stanford University and Michael Woodford of Columbia University have won the 2026 Nobel economics prize for building models that help central banks and governments respond to economic shocks. The Royal Swedish Academy of Sciences announced the award in Stockholm on Monday, the last of this year's Nobel prizes.

The academy said their work underpins the tools policymakers now use to deal with inflation, recessions and sudden shifts in household spending, including during the pandemic and the recent energy crises.

What did the academy say Hall and Woodford achieved?

According to Al Jazeera and The Guardian, the two economists developed macroeconomic models built on how individual households and businesses behave, rather than on statistical links between broad measures such as inflation, production and consumption. The academy called the result a "paradigm shift" in the theory of stabilization policy.

John Hassler, chair of the prize committee, said the work gave a stable theoretical foundation for models used by central banks and governments around the world. With them, he said, policymakers are better equipped to handle shocks such as energy crises.

What was wrong with the older approach?

For decades, governments followed the ideas of British economist John Maynard Keynes, cutting taxes and raising spending to restart growth. The Independent reported that policymakers also assumed simple trade-offs, such as unemployment staying low when inflation was high.

The 1970s broke that assumption. The Guardian reported that countries then suffered high inflation, weak growth and high unemployment at the same time. Timo Boppart of the prize committee said the Keynesian recipe "worked well — until it didn't."

What did each laureate find?

Hall studied how consumers decide how much to spend based on what they expect to earn in the future. According to the committee, as reported by The Independent, optimistic households spend more than pessimistic ones, and some households are too poor to borrow or draw on savings. In a 1982 paper with Fredric Mishkin, Hall found that around 80% of households based spending on future expectations, while the rest had little such flexibility.

Woodford showed that businesses set prices based partly on where they expect interest rates, their competitors' prices and their own costs to go. The Guardian reported that he built on Hall's work to create the New Keynesian model, which it described as the main framework for policymakers today.

Why does it matter for people outside economics?

The research shaped how central banks talk to the public. The committee said that because businesses and households act on expectations, central banks should communicate clearly and credibly about their reasoning and plans. The Independent reported that central banks have responded by working harder to explain their decisions.

The Guardian reported that this work also led to forward guidance, in which central bankers signal where they expect interest rates to go. It became an important tool after the 2008 financial crisis and during the Covid pandemic, when rates were cut to record lows. The model was also used after 2008 as policymakers worked to avoid a second great depression, according to The Guardian.

The approach has critics. The Guardian noted that Kevin Warsh, the current chair of the U.S. Federal Reserve, has argued that forward guidance should play only a limited role in normal times. It also recalled that in 2014 Bank of England Governor Mark Carney was nicknamed an "unreliable boyfriend" after hinting at rate rises that did not happen.

How did the laureates react?

Woodford spoke to reporters in Stockholm by phone from New York. He called the prize a tremendous honor and a surprise, and The Guardian reported that he said he was elated.

What is the prize, and what does it pay?

The economics prize is not one of the five awards created in Alfred Nobel's 1895 will. Sweden's central bank established it, in 1968 according to The Independent, and Al Jazeera said it was first awarded in 1969. Its formal name is the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.

This year's prize is 12 million Swedish kronor, about $1.2 million. Al Jazeera reported that the award also includes a diploma and a gold medal. Last year's prize went to Joel Mokyr, Philippe Aghion and Peter Howitt for work on how new technology drives growth. Al Jazeera noted that most past laureates have been from the United States.

Sources: The Independent, Al Jazeera, The Guardian