Nobel Prize for economists who help prevent financial crises

This year's Nobel Prize in Economics goes to two American scientists who have radically changed the way we think about economic crises and the policies of central banks. Robert E. Hall and Michael Woodford receive the prestigious award for their research into how households and businesses respond to economic developments. Their insights play an important role in how central banks try to stabilize the economy.

Robert E. Hall, associate professor at Stanford University, and Michael Woodford, professor at Columbia University, share the 2026 Nobel Prize in Economics.

According to the Swedish Royal Academy of Sciences, the researchers have made important contributions to understanding economic fluctuations and the possibilities of limiting them with policy.

Their work shows how consumer and business expectations affect the economy. This concerns, for example, whether people expect prices to rise further, how many companies want to invest and how households react to changes in interest rates.

Those expectations are important for central banks. Their interest rate decisions not only have consequences for the current economy, but also influence the choices that consumers and companies make in the future.

Hall and Woodford's research has thus contributed to the development of economic models that central banks use to better assess the consequences of their policies.

The scientific contributions of the two economists stem from a period in which existing economic theories were increasingly inadequate.

In the 1970s, many Western economies faced an unusual combination of high inflation and weak economic growth. That phenomenon is known as stagflation.

Traditional economic models could hardly explain this situation. For a long time, economists assumed that high inflation was mainly associated with a strong economy and low unemployment.

The reality turned out to be more complicated. Prices could also rise rapidly as economic growth slowed and unemployment rose.

That forced economists to rethink the way the economy works.

Hall and Woodford made important contributions to that development. Their research helped explain why decisions made by households and businesses, and especially their expectations about the future, determine economic developments.

Woodford's work in particular has had a major influence on modern thinking about monetary policy, i.e. the way in which central banks try to steer the economy with interest rates and other instruments.

An important insight is that central banks do not only exert influence by actually changing interest rates.

Their communication can also have economic consequences.

For example, when a central bank makes it clear that interest rates will remain high for the time being, households and companies can adjust their financial decisions accordingly. This can slow down the demand for goods and services and thus help to reduce inflation.

It also works the other way around. If consumers and businesses expect borrowing to become cheaper, they may decide to spend money or make investments earlier.

The research of the prize winners has helped to better understand this interaction between expectations, economic behaviour and monetary policy.

Hall and Woodford collectively receive 12 million Swedish kronor, equivalent to about 1.2 million dollars.

The prize was announced by the Swedish Royal Academy of Sciences. The Nobel Prize in Economics was established by the Swedish Central Bank in 1968 and first awarded a year later. Unlike the original Nobel Prizes, this award was not part of Alfred Nobel's will.