By Simon Johnson and Johan Ahlander
STOCKHOLM, Oct 12 (Reuters) - US academics Robert Hall and Michael Woodford won the 2026 Nobel economics prize on Monday for decades of work developing ground-up models currently used by central banks and finance ministries across the world to stabilise economies.
"With them, we are better equipped to deal with shocks in the economy, such as energy crises or sudden changes in how much households consume," John Hassler, Chair of the Committee for the Prize in Economic
Sciences, said in a statement.
Woodford and Hall are frequently name-checked by the world's top central banks which, after a 2022 inflation surge in the aftermath of the COVID-19 pandemic, are currently grappling with the energy shock triggered by the Iran war.
One of the laureates' key insights is that economies could only be kept on an even keel by taking into account the millions of decisions made at a micro-level by households and businesses, rather than by using top-down theories of how economies work.
"...Authorities shouldn't view stabilization of the economy as an exercise that is simply conducted by people pulling levers to control the economy independently of what people in the economy understand about this," Columbia University's Woodford, 70, told a news conference.
In contrast to the oil shocks of the 1970s, when central banks struggled to combat sky-high inflation, Woodford said the new framework was useful during the global financial crisis of the late-2000s to bolster traditional tools of monetary policy.
"Making more explicit statements about the likely future path of interest rate policy, as opposed to relying on simply being able to cut interest rates further immediately, that was an important part of the policy response in the years from 2009 onward," he said.
Beyond so-called "forward guidance" on the future path of monetary policy, the work of Woodford — and Hall, 83, at Stanford University — promoted other concepts used today such as the idea of "sticky" inflation when price changes lag changes in demand.
Another is the "output gap", a measure of demand pressure building up in an economy and how efficiently resources are being used - the goal of stabilisation policy being to steer that gap towards zero.
CORE CENTRAL BANK CONCEPTS
Hall has served as adviser to the US Treasury Department, the Justice Department and the Federal Reserve Board.
His insight in a 1978 paper that household decisions on consumption are a perfect indicator of their expectations was used by Woodford in a model on how consumption is determined.
Woodford also showed that central banks can stimulate or suppress economic activity by adjusting interest rates, rather than just by the amount of money in circulation.
Such concepts remain core to central banking today. Forward guidance became especially important after the 2008 financial crisis, when rates were near zero or even negative and standard monetary policy seemed to be out of ammunition.
Now, however, some are questioning how relevant it is given the amount of uncertainty in the global economy - with new US Federal Reserve Chair Kevin Warsh a notable sceptic.
The economics prize, formally known as the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, is the final award to be given out this year and is worth 12 million Swedish crowns ($1.2 million).
First awarded in 1969, it is not one of the original five awards created in the 1895 will of industrialist and dynamite inventor Alfred Nobel, but was established by Sweden's central bank.
The majority of previous laureates have been from the United States. Only three women have ever won, most recently Claudia Goldin in 2023 for work on how gender has affected pay and employment over time in the United States.
Last year's winners, Joel Mokyr, Philippe Aghion and Peter Howitt, won for work on "creative destruction" and how new technology and production methods can boost growth and living standards.
The Nobel prizes for medicine, physics, chemistry, literature and peace were announced last week.
($1 = 10.0028 Swedish crowns)
(Reporting by Simon Johnson, Niklas Pollard, Johan Ahlander and Marie Mannes in Stockholm, Terje Solsvik in Oslo, Mark John in London; Editing by Alex Richardson and Toby Chopra)
