The Royal Swedish Academy of Sciences has awarded the 2026 Sveriges Riksbank Prize in Economic Sciences to Robert Hall and Michael Woodford for developing “microeconomic foundations of macroeconomic stabilisation”.
Hall is a professor at Stanford University while Woodford is a professor at Columbia University. The prize, which is awarded in memory of Alfred Nobel, awards SKr12m (£900,000) split equally between the two laureates.
The academy’s citation said: “This year’s laureates in the economic sciences, Robert Hall and Michael Woodford, have developed new macroeconomic models that have significantly improved our ability to implement effective stabilisation policy. On the basis of these models, well-timed fiscal and monetary policy measures can reduce the economy’s peaks and troughs.”
Macroeconomic stabilisation policy, which aims to smooth economic upswings and downturns through interest rate and fiscal measures, draws on ideas from the economist John Maynard Keynes, developed almost a century ago. Keynesian models broke down during the 1970s oil crises, when inflation rose even as unemployment increased, contributing to a decade of low growth and high inflation across Western economies.
Robert Lucas Jnr, the 1995 economics laureate, argued that stabilisation models need ‘microfoundations’: to work from microeconomic relationships derived from the millions of decisions made by individual households and businesses, rather than assumed statistical links between variables such as inflation and unemployment.
In short, this means that macroeconomic phenomena can only be understood if economists study the behaviour of individual actors and then add it all together. Hall and Woodford built models that put this approach into practice.
In a 1978 paper, Hall argued that if consumption depends on households’ expectations of future income, and new information is by definition unpredictable, then changes in consumption should also be unpredictable. A 1982 paper by Hall and Frederic Mishkin tested this using household data and found that around 80% of households made consumption decisions consistent with the theory, while the rest lived hand-to-mouth.
In a 2003 book, Woodford set out a three-equation New Keynesian macro model built on microfoundations, which has since become the basis for similar models elsewhere. The model incorporates the ‘natural’ interest rate, a concept introduced by the 19th-century economist Knut Wicksell, and the ‘output gap’, a term Woodford coined to describe the difference between actual and potential economic output.
New Keynesian models based on microfoundations are now used by central banks and finance ministries worldwide, including an adapted version at Sweden’s Sveriges Riksbank central bank, to help guide decisions on interest rates and fiscal policy.
John Hassler, chair of the committee for the Prize in Economic Sciences, 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. 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.”