STOCKHOLM (AP) — American economists Robert E. Hall and Michael Woodford have won the Nobel Prize Memorial Prize in Economics on Monday for their work on models that helped governments and central banks manage economic shocks, such as energy crises and inflation.
The Royal Swedish Academy of Sciences announced the winners in Stockholm, noting that their work has created the theoretical foundations to better understand how consumers decide to save or spend, information that makes it easier for policymakers around the world to stabilize their budgets. savings after fluctuations.
“The laureates’ research has made it possible to manage major macroeconomic crises much more effectively than before,” the Nobel committee wrote in an article explaining the economists’ work. “This has been extremely beneficial during the pandemic and energy crises of recent years.”
Hall, 83, is affiliated with Stanford University in California. Woodford, born in 1955, is affiliated with Columbia University in New York.
Woodford spoke to the committee by telephone from New York: “It’s a tremendous honor. It’s a surprise.”
Duo overturned previous economic assumptions
For decades, governments have responded to economic shocks by following British economist John Maynard Keynes’ recommendations dating back to the Great Depression: intervene in the economy by lowering interest rates and taxes and increasing government spending, thereby encouraging consumers and businesses to spend and invest and reigniting growth.
“It’s the Keynesian recipe and it worked well – until it didn’t,” said Timo Boppart of the Nobel economics committee.
Policymakers believed that economic management involved simple tradeoffs: unemployment, for example, would remain low in times of crisis. high inflation and increase when inflation falls. But the “ stagflation ” of the 1970s – when the global economy simultaneously experienced high inflation and high unemployment – proved that the formula was simplistic.
Some economists argued that government attempts to intervene in the economy were doomed to failure. But Hall and Woodford, in separate contributions, set out to improve the Keynesian model to take into account how consumers and businesses actually make decisions about whether to invest and spend.
“Economic outcomes are the result of millions of decisions made at the micro level by households and businesses,” the Nobel committee wrote. “Using models based on this approach, rather than simply studying the economy from a macro perspective, such as a bird’s eye view,” Hall and Woodford’s research “generated a paradigm shift in stabilization policy theory.”
Hall studied consumer choices
Hall studied how consumers’ decisions about whether and how much to spend depend on what they expect their future income to be.
“If they are optimistic, they will consume more than if they are pessimistic,” writes the committee. But consumer expectations can change unexpectedly as new information about the economy arrives. Hall found that predicting future consumer spending is virtually impossible.
The idea that consumption is generally unpredictable “is not good news for forecasters or policymakers,” Olivier Blanchard, chief economist at the International Monetary Fund during the 2008 financial crisis, said by email. “But it is news they need to take into account when thinking about the effects of policy.”
Hall also explored the idea that some households are so financially strapped that they cannot borrow or dip into their savings in response to economic changes. In a 1982 paper with economist Fredric Mishkin, Hall found that about 80 percent of households made spending decisions based on their expectations for the future “while the rest lived from day to day,” the committee wrote.
“The prize is awarded to research that deepens our understanding of macroeconomics from the bottom up, from families and businesses making decisions over time, while looking toward the future,” Ivan Werning, an economist at the Massachusetts Institute of Technology, said in an email.
Woodford analyzed how companies make decisions
Woodford’s research established that companies make pricing decisions based on future interest rate trends.
“If the company believes that its competitors’ prices and its own costs will increase, it is better to set a higher price than if it expected the opposite,” the Nobel committee wrote. “Companies’ decisions are therefore also governed by their expectations.”
Therefore, central banks such as the US Federal Reserve, which sets short-term interest rates, should provide “clear and credible communication about how they think and what they plan to do.” Central banks responded to this finding by scrambling to explain what they were doing.
New Fed Chairman Kevin Warsh said the trend towards such “forward guidance” has gone too far. He’s trying to reduce the amount of talk from the U.S. central bank about its thinking and intentions.
Woodford’s research also offers guidance on how central banks should respond to energy price shocks – like the one following the US and Israeli attack on Iran in February – which can both fuel inflation and drive up unemployment.
“Unlike traditional Keynesian models, the Woodford model recommends a cooling measure, such as an increase in interest rates, to avoid uncontrolled inflation,” the Nobel committee wrote. “His insight helped respond to recent supply shocks more effectively than during the oil crises of the 1970s.”
In the call broadcast during a news conference, Woodford said his work focuses on “understanding the people who are in the markets and making spending decisions.”
The winners did not immediately respond to requests for comment from The Associated Press.
The economics prize is the latest Nobel announcement of this year
The economics prize is officially known as the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel. The central bank established it in 1968 in memory of Nobel, the 19th-century Swedish businessman and chemist who invented dynamite and created the five Nobel Prizes.
Nobel purists point out that the economics prize is not technically a Nobel Prize, but is still awarded with the others on December 10, the anniversary of Nobel’s death in 1896.
Nobel honors were announced last week at medicine, physical, chemistry, literature And peace.
The prize awarded Monday was the second Nobel Prize awarded to a Stanford University professor this year. Dr. Karl Deisseroth shared the medicine prize with Peter Hegemann and Georg Nagel for their work which resulted in a tool using light to help understand how the brain works.
This year’s prize money is 12 million Swedish crowns (about $1.2 million), whether for an individual, a small group of winners or an organization.
___
Wiseman reported from Washington. Dazio reported from Berlin. Associated Press writer Wyatte Grantham-Philips in Chicago contributed to this report.
___
AP Nobel Prize: https://apnews.com/hub/nobel-prizes
Gn headline
