Nobel goes to architects of economic stability

US economists Robert Hall and Michael Woodford won the 2026 Nobel Prize in Economic Sciences on Monday for research that has helped shape modern monetary policy, giving central banks and finance ministries tools to understand economic behaviour and respond to inflation and other shocks.

Their work established the importance of incorporating the decisions of households and businesses into economic models, providing policymakers with a framework to assess how changes in interest rates, consumer spending and expectations affect the wider economy.

“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.

The award comes as central banks confront renewed energy-price pressures linked to the Iran war, following the inflation surge that swept across the world after the Covid-19 pandemic in 2022.

Hall, 83, of Stanford University, and Woodford, 70, of Columbia University, are widely cited in the work of leading central banks.

Their research has informed policies aimed at stabilising economic activity and controlling inflation by accounting for how households and businesses respond to policy decisions.

A central insight of their work is that economic stability cannot be achieved through top-down interventions alone. Policymakers must also consider millions of individual decisions that collectively determine consumption, investment and price movements.

“Authorities shouldn’t view stabilisation 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,” Woodford told a news conference.

Their contributions have helped establish concepts that remain central to monetary policy, including forward guidance, sticky inflation and the output gap.

Forward guidance involves central banks communicating the likely future direction of interest rates to influence economic expectations and spending decisions.

It became particularly important after the global financial crisis of 2008, when interest rates approached zero or even fell below it, limiting the scope for conventional monetary easing.

Woodford said clearer communication about the future path of interest rates had become an important part of the policy response from 2009 onwards, when central banks had limited room to cut rates further immediately.

The approach helped strengthen traditional monetary policy tools during the financial crisis.

However, its effectiveness is now being questioned amid heightened uncertainty in the global economy, with new US Federal Reserve Chair Kevin Warsh among its prominent sceptics.

Another concept associated with their work is sticky inflation, which describes how prices adjust slowly to changes in demand and economic conditions.

The output gap, meanwhile, measures the difference between actual economic output and its potential level, indicating the degree of pressure on productive capacity. Stabilisation policy seeks to bring this gap towards zero.

Hall’s contribution includes a 1978 paper arguing that household consumption decisions provide a valuable indication of people’s expectations about the future. Woodford subsequently incorporated this insight into a model explaining how consumption is determined.

Hall has also served as an adviser to the US Treasury Department, the Justice Department and the Federal Reserve Board.

Woodford’s research demonstrated how central banks can influence economic activity by adjusting interest rates, rather than relying solely on changes in the amount of money circulating in the economy.

The prize, formally known as the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, carries a monetary award of 12 million Swedish kronor, equivalent to about $1.2 million.

First awarded in 1969, it was established by Sweden’s central bank and was not among the five original Nobel prizes specified in the 1895 will of Swedish industrialist and dynamite inventor Alfred Nobel.

Most previous recipients have been from the United States. Only three women have won the economics prize, most recently Claudia Goldin in 2023 for research into how gender has shaped wages and employment in the United States over time.

Last year’s prize went to Joel Mokyr, Philippe Aghion and Peter Howitt for their work on “creative destruction” and how technological advances and new production methods drive economic growth and improve living standards.

The economics award was the final Nobel Prize to be announced this year. The prizes for medicine, physics, chemistry, literature and peace were announced last week.