Two American economists win the Nobel prize for work on steadying economies

The Royal Swedish Academy of Sciences said on Monday that Robert E. Hall of Stanford University and Michael Woodford of Columbia University had won the Nobel Prize in economics for research on how policymakers can stabilise economies¹. The Centre for Economic Policy Research said the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel was awarded to the pair “for microeconomic foundations of macroeconomic stabilisation”³.

Nature said the laureates share an award that builds on the theories that contributed to governments intervening during the COVID-19 pandemic⁵. Axios said their work helped shape how central banks set interest rates and communicate policy¹. The Columbia Spectator said Woodford has previously worked at the Federal Reserve, Harvard University and the European Central Bank, and returned to Columbia in 2004⁷. The Daily Princetonian said he resigned from Princeton that year to take a chair in political economy at Columbia⁸.

Why it matters to investors

Axios said that for decades policymakers relied on models that linked higher inflation with lower unemployment, and that the framework broke down during the stagflation of the 1970s, when both prices and joblessness surged at the same time¹. The Conversation said research from the European Central Bank shows that clear communication from central banks reduces short-term interest rate volatility⁶.

The Financial Times said the prize went to two economists who transformed crisis management². Fortune said the award went to the scholar whose work shaped the Federal Reserve’s forward guidance, and that the new Fed chair, Kevin Warsh, has said the trend towards such guidance went too far and is trying to scale back how much the US central bank signals⁹. The Financial Times said the Federal Reserve takes a very different tack under Warsh, a longstanding critic of forward guidance who had quit the Fed².

What to watch

Axios said the win comes as central banks fight energy-driven inflation and risks to economic growth¹. Fortune said Warsh is trying to scale back how much the US central bank signals about its intentions⁹, so how much guidance a tightening Fed gives about its next move is the open question for rates markets².

The Guardian, reporting the prize alongside its market coverage, said markets increasingly expect the Bank of England to raise rates at its meeting on 5 November, and that its own writer concurred while putting the move at no more than likely⁴. Nature said the laureates’ work underpinned the government interventions of the pandemic years⁵, and The Conversation pointed to European Central Bank research showing that clearer central bank communication lowers short-term rate volatility⁶.