Two American Economists Win Nobel for Models Used to Tame Economic Shocks

American-born economists Robert E. Hall and Michael Woodford won the Nobel memorial prize in economics on Monday for research that shaped the models central banks and governments use to respond to economic shocks, such as energy crises and bouts of inflation, according to ABC News and CBS News.

The Royal Swedish Academy of Sciences announced the award in Stockholm. Hall is affiliated with Stanford University in California, and Woodford with Columbia University in New York. CBS News reported that Hall is 83 and Woodford was born in 1955.

What the academy said the two economists achieved

The academy honored the pair "for microeconomic foundations of macroeconomic stabilisation," according to CBS News. In a statement, it said the laureates had helped smooth out the economy's peaks and troughs.

John Hassler, chair of the Committee for the Prize in Economic Sciences, said their work gave a stable theoretical foundation to models now used by central banks and governments worldwide. He said those tools leave policymakers better equipped to handle shocks, including energy crises or sudden shifts in how much households consume.

From the Keynesian approach to a new foundation

For decades, governments facing economic shocks followed the Depression-era ideas of British economist John Maynard Keynes. That meant cutting taxes and raising government spending to encourage consumers and businesses to spend and invest, which in turn would restart growth.

Timo Boppart of the prize committee said that approach "worked well - until it didn't." Policymakers had assumed simple tradeoffs, such as unemployment staying low when inflation was high and rising when inflation fell. The stagflation of the 1970s, when high inflation and high unemployment occurred together, showed that view was too simple, according to the reports.

ABC News reported that some economists then argued government attempts to steer the economy were bound to fail. Hall and Woodford, working in separate contributions, instead sought to improve the Keynesian model by accounting for how consumers and businesses actually decide whether to spend and invest.

The committee wrote that economic outcomes result from millions of decisions made by households and businesses. It said research built on that approach, rather than a bird's-eye macro view, produced a paradigm shift in the theory of stabilization policy.

Woodford on explaining policy to the public

Woodford spoke to the committee by phone from New York and called the award a surprise. According to ABC News, he said his work has emphasized understanding the people who make spending decisions in markets. He also said a key goal of the framework was to let governments explain to the public what they are doing and why, rather than simply applying policy to people.

Why it matters for ordinary households

The prize recognizes ideas behind how officials respond when energy costs jump, inflation climbs or household spending changes abruptly. Those responses affect prices, jobs and the broader economy. The committee's point is that today's models start from the choices of households and businesses, and Woodford stressed that clear communication with the public is part of the policy toolkit.

About the prize

The economics award is formally the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel. The central bank established it in 1968. Purists note it is technically not one of the five original Nobel Prizes, but it is presented alongside them on Dec. 10, the anniversary of Alfred Nobel's death in 1896.

This year's prize money is 12 million Swedish kronor, about $1.2 million, regardless of whether it goes to one person, a small group or an organization. Last year's award went to three researchers who study how new products and inventions drive economic growth.

CBS News, citing Reuters, noted that most past economics winners have been from the U.S. and that only three women have won. The most recent was Claudia Goldin in 2023, for work on how gender affects pay and employment over time in the U.S.

Around Prague, based on reporting by ABC News, CBS News