Robert E. Hall of Stanford University and Michael Woodford of Columbia University have been awarded the 2026 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for research that changed how governments and central banks seek to stabilise economies during periods of instability. Their work has helped explain how fluctuations in inflation, economic growth and employment develop, and how policymakers can limit their social and economic costs.
The Nobel committee said their contributions had “generated a paradigm shift in stabilisation policy” and were “now used by central banks and finance ministries around the world”. Together, it added, their research provided “a new foundation for the theory of macroeconomic fluctuations”, enabling economists to develop a deeper understanding of the sources and mechanisms behind recessions and booms.
The award, worth 12 million Swedish kronor, or approximately $1.2 million, recognises two economists whose work has substantially influenced the conduct of monetary policy. John Cochrane, an economist at the Hoover Institution, a thinktank based at Stanford University, described it as “an excellent prize, honouring two superb and highly influential economists”. Olivier Blanchard, formerly chief economist at the International Monetary Fund, said their contributions had “dramatically changed the conduct of monetary policy”.
Cochrane noted that at least a dozen economists could plausibly have received the award for work in the field. Choosing among them would have been difficult, he said, but Hall and Woodford “were top contenders on anyone’s list”.
The theories recognised by the prize build on the work of the British economist John Maynard Keynes, whose arguments for government intervention during economic crises became central to economic policymaking during the twentieth century. Keynes maintained that governments needed to act on a large scale during periods of instability to prevent economic collapse and mass unemployment, as experienced during the Great Depression of the 1930s. Market forces alone, he argued, could not respond sufficiently quickly or effectively to such crises.
Keynes’ ideas became highly influential from the middle of the twentieth century onwards. They were also reflected in government responses to the Covid-19 pandemic, when countries funded businesses to help them retain employees during lockdowns. Yet the persistence of economic boom-and-bust cycles, including the oil crisis of the 1970s and the financial crisis of 2008, demonstrated that Keynesian approaches had not eliminated damaging fluctuations.
Hall and Woodford helped develop a more detailed account of how these fluctuations arise by connecting macroeconomics, which examines the economy as a whole, with microeconomics, which studies how individual households and businesses make decisions affecting spending, earnings and prices. Their research placed particular emphasis on expectations about the future and how those expectations influence economic behaviour.
Hall, whose work is based at Stanford University in California, examined how decisions about consumption depend not only on measurable factors such as income but also on expectations and psychological influences. Keynes described some of these influences as “animal spirits”, referring to the factors shaping economic choices beyond straightforward calculations of financial circumstances.
In two influential papers published in 1978 and 1982, Hall developed a method for estimating the proportion of consumers who make spending decisions by anticipating possible changes in future monetary and fiscal policies, as distinct from those whose decisions are driven primarily by their immediate financial circumstances. The latter group might, for example, expect to have no savings or access to borrowing and make consumption choices accordingly. Hall tested his predictions against real-world consumption data, connecting theoretical assumptions about behaviour with observed economic decisions.
Woodford subsequently developed these insights into a New Keynesian microeconomic theory, bringing expectations into a framework for understanding monetary policy. His work culminated in the 2003 book Interest and Prices: Foundations of a Theory of Monetary Policy, published by Princeton University Press. The framework established a way to analyse how central banks influence economic activity through their policy decisions, particularly by setting interest rates.
The model is now used by institutions including the US Federal Reserve, the Bank of England and Sweden’s Riksbank, which established and funds the economics prize. Central banks use such frameworks when deciding how to adjust interest rates to moderate fluctuations in growth and inflation. The model predicts an ideal interest rate that balances incentives to spend and invest, avoiding settings that encourage excessive consumption or discourage spending and investment.
The framework also has implications for fiscal policy, including decisions about taxation. Tax rates influence household and business spending, making them another instrument through which governments can affect economic activity. Cochrane said Woodford’s work was centrally concerned with monetary policy and the actions available to the Federal Reserve. “He shows how the Fed can affect the economy by setting interest rates, which it does,” he said.
Woodford, speaking by telephone after the announcement, said he was “elated” to receive the award. He stressed that the theory was intended not merely to guide policymakers but also to help governments explain their decisions to the public, enabling them “to talk to people about why the things that are being done are being done”.
Jim O’Neill, a former UK Treasury minister who now informally advises UK Prime Minister Andy Burnham, welcomed the recognition of the framework but warned that its principles were not consistently reflected in contemporary policymaking. He said the foundations for which the laureates had been recognised had been “neglected by many current governments”. O’Neill expressed concern that governments were tempted to cut taxes when economies weakened but failed to adjust taxation accordingly when conditions improved.
