Two US professors win Nobel Prize in Economics for stabilisation models

Research by two American economists on how governments and central banks can respond to economic shocks has earned them this year’s Nobel economics prize.

Robert Hall, 83, of Stanford University, and Michael Woodford, a Columbia University professor born in 1955, were recognised for developing economic models that help explain how monetary and fiscal policies can reduce fluctuations in economic activity.

Their work examines how decisions by households and businesses shape the wider economy, particularly when people decide whether to spend or save based on their expectations about the future. It also explains how the way governments and central banks communicate policy decisions can influence those expectations.

The Royal Swedish Academy of Sciences said the research offers a framework for understanding when policy intervention can help limit economic downturns and excessive fluctuations.

“On the basis of these models, well-timed fiscal and monetary policy measures can reduce the economy’s peaks and troughs,” the prize committee said.

The economists developed their approaches independently after existing economic models faced challenges during the oil crises of the 1970s. At the time, approaches based on the theories of British economist John Maynard Keynes were widely used to guide government efforts to support growth, but the crises exposed limitations in the models used to determine when and how such measures should be applied.

Hall and Woodford took a different approach by grounding their models in the decisions of individuals and businesses instead of relying primarily on statistical relationships between indicators such as inflation, production and consumption.

John Hassler, chair of the Committee for the Prize in Economic Sciences, said the laureates’ work had established a theoretical basis for models used by central banks and governments worldwide.

Woodford said he was surprised by the announcement and described the award as a tremendous honour. He told reporters by phone that his research was intended to improve the basis for discussions on economic policy and help the public understand those decisions, rather than advance a particular political agenda.