Robert Hall and Michael Woodford have been awarded the Nobel economics prize for developing models designed to help policymakers manage disruptive economic fluctuations.

Their work examines how monetary and fiscal policy can respond to recessions and other crises, particularly when conventional policy tools are no longer sufficient. Hall is a professor at Stanford University, while Woodford is a professor at Columbia University.

Microeconomic foundations

The Nobel prize jury said the economists moved beyond relying mainly on statistical relationships between broad indicators such as inflation, production and consumption. Instead, their models were built on a microeconomic foundation that considers how households and businesses influence the wider economy through their decisions.

The approach also reflects the idea that households make forward-looking choices about whether to spend or save. According to the jury, properly timed fiscal and monetary measures based on these models can help reduce the economy’s peaks and troughs.

John Hassler, chair of the prize-awarding committee, said the laureates’ work had provided “a stable theoretical foundation” for models now used by central banks and governments around the world.

Lessons from economic crises

The Royal Swedish Academy of Sciences said stabilisation policies had long enabled governments to support growth when necessary, following the development of John Maynard Keynes’s economic theories. However, it said Keynesian models used during the oil shocks of the 1970s were no longer effective for determining when and how officials should respond.

Woodford pointed to the 2008 financial crisis as an example of the practical importance of the work. In many countries, interest rates had already been reduced to zero, leaving traditional monetary policy tools inadequate for restoring economic activity.

He said central banks responded in part by making more explicit statements about the future direction of interest rates. Woodford said this approach contributed to better stabilisation, while stressing that it did not solve the crisis on its own.

“It’s a surprise, but I’m feeling very good about it,” Woodford told reporters by telephone after the announcement. He also described receiving the award as “a tremendous honour” and said he felt “elated.”

Woodford said his theories had not been driven by a specific political agenda. Rather, he described the work as an effort to improve the foundations for discussing economic policy, managing the economy and strengthening public understanding.

Hall, who is 83, and Woodford, who was born in 1955, will receive a diploma, a gold medal and a cheque worth $1.2 million. The source does not provide a breakdown of the prize money between the two laureates.