Nobel economics prize goes to Hall and Woodford for crisis-smoothing models

Two American economists won the 2026 Nobel economics prize for building the models that central banks and finance ministries now use to steer economies through crises. Robert Hall of Stanford University and Michael Woodford of Columbia University received the award for their work on the “microeconomic foundations of macroeconomic stabilisation”. The Royal Swedish Academy of Sciences said the pair brought about “a paradigm shift in stabilisation policy”. The prize is worth a combined $1.2m (£900,000).

From Keynes to New Keynesian

Hall and Woodford improved on John Maynard Keynes’s stabilisation models, which had struggled to explain the simultaneous high inflation, weak growth and high unemployment of the 1970s. They showed how traditional models could be rebuilt from the ground up, based on the actions of individual households and businesses. Hall focused on forward-looking consumer behaviour, while Keynes had relied on more mechanical rules of thumb linking inflation, unemployment and GDP. Woodford then used that work to create the New Keynesian model, a full macroeconomic stabilisation framework that is now the main tool for policymakers.

That model was put to the test after the 2008 financial crisis, when policymakers steered the global economy away from the risk of a second great depression. John Hassler, chair of the committee for the economics prize, 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”. He added that these models leave policymakers better equipped to deal with shocks such as energy crises or sudden changes in household consumption.

Forward guidance and its critics

The laureates’ research also led to the development of forward guidance, where central bankers communicate their expected future interest-rate path. That tool proved important after the 2008 crisis and during the Covid pandemic, when interest rates were cut to record lows. But forward guidance has its critics. Kevin Warsh, current chair of the US Federal Reserve, has argued it should have only a “limited and circumscribed” role in normal times to avoid “creating ambiguity in the name of clarity”. And in 2014, then Bank of England governor Mark Carney was labelled an “unreliable boyfriend” after dropping hints about interest-rate rises that never materialised.

Woodford, speaking to reporters in Stockholm by phone, said he was “elated” and that the award was “a tremendous honour”. Jennifer L Mnookin, Columbia University president, offered her deepest congratulations, saying Woodford’s work with Hall had “fundamentally reshaped the theoretical foundations of stabilisation policy” and provided tools to navigate economic ups and downs more effectively. Hall is also known for coining the idea that US economists are divided into freshwater and saltwater varieties — the former based at inland universities near the Great Lakes and favouring free markets, the latter clustered at coastal schools and more open to government intervention. The economics prize is not one of the five created by Alfred Nobel but was invented by Sweden’s central bank and is formally known as the Sveriges Riksbank prize in economic sciences in memory of Alfred Nobel.