Two Americans win economics Nobel for stabilization models

Robert Hall and Michael Woodford —AFP

Stockholm, SWEDEN—Americans Robert Hall and Michael Woodford were awarded the Nobel economics prize on Monday for their work on how monetary and fiscal policy can better stabilize disruptive economic fluctuations.

The two were honored for developing new models for managing recessions and other crises that fail to respond to traditional tools.

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

The Royal Swedish Academy of Sciences explained in a statement that ever since John Maynard Keynes formulated his economic theories almost a century ago, “stabilization” policies had long let officials boost economic growth when needed.

But during the oil shocks in the 1970s, the Keynesian models that governed when and how action should be taken no longer worked.

“Rather than basing the models on statistical links between macroeconomic variables, such as inflation, production and consumption, they chose to build them on a microeconomic foundation,” the jury said.

‘Eureka moment’

Hall and Woodford’s models include an “understanding for how the total mass of individual households and businesses affect the economy through their actions,” it said.

A fundamental aspect of this is the understanding that households are forward-looking when making decisions about spending or saving.

This means the way governments and central banks communicate their policies can influence people’s views of the future when making such decisions.

In 1978, Hall, now 83 and a Stanford University professor, published a seminal article on consumption. The academy described this as “something of a eureka moment” and his work then became key to the development of modern research on consumption.

In 2003, Woodford published a book where he presented a “New Keynesian macro model built upon microfoundations,” the academy said.

“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 prize-awarding committee.