The economy It does not work solely on the basis of large variables such as inflation, consumption or the Gross Domestic Product (GDP). Behind these indicators there are millions of individual decisionsranging from how much does a family savehow much you spend and How a neighborhood business sets prices. Understanding how these decisions relate to each other and condition the results of the economy earned two American economists yesterday the Nobel Prize in Economics 2026.
Robert E. Hallprofessor at Stanford University, and Michael Woodfordfrom Columbia University, were honored for their contributions to the microeconomic foundations of macroeconomic stabilization.
According to the Royal Swedish Academy of Scienceshis research led to the development of models that significantly improved the ability of governments and central banks to implement policies aimed at moderating economic fluctuations.
Los traditional Keynesian models were based on the supposed stability of statistical correlations between macroeconomic variables such as inflationhe consumption or the unemployment: during the crisisthe economy was stimulated by reducing interest rates and increasing the budget deficit, and vice versa.
The winners “laid the foundations of paradigma neokeynesianoin which models are built on microfoundations, meaning bottom-up. Economic outcomes are the result of millions of decisions made at the micro level by households and businesses. 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 has generated a paradigm shift in the theory of stabilization policy,” published the Royal Swedish Academy of Sciences.
The distinction also recognizes a transformation in economic theory. During the oil crises Since the 1970s, Western economies faced a combination of stagnation, high unemployment, and persistent inflation, a phenomenon known as stagflation. This exposed the difficulties of traditional Keynesian models and opened the debate on the capacity of stabilization policies to contain crises without generating new imbalances.
Economists like Robert E. Lucas Jr. (Nobel winner in 1995) pointed out that the problem with these models was assuming that the relationship between these macroeconomic variables was stable and suggested that they should also include microeconomic relationships.
It was Hall, who in an article published in 1978, solved the problems of these models and how private consumption is determined, initiating a new way of thinking, the Academy noted.
His central idea was that changes in consumption could not be predicted, because they depend on new and, therefore, unpredictable information, which was key to the development of modern research on consumption.
Photo: El País Archive.
In another later article, written with Fredric Mishkin In 1982, Hall showed – analyzing a series of households with microdata – that about 80% made decisions in accordance with the theory, while the rest lived from day to day.
Together with his colleague at the Hoover Institution, Alvin Rabushkadeveloped a reference framework for equitable and efficient consumption taxation.
Their 1981 article was the starting point of a growing interest in consumption taxes. The two wrote the book ‘The Flat Tax‘ (The flat rate tax).
In 2003, Woodford presented a new macromodelo keynesiano based on microfoundations and which has become a prototype of subsequent neo-Keynesian models.
Thus, when describing how consumption is determined, it includes Hall’s results on the dependence of households’ expectations on their future income or shows how central banks can stimulate or suppress economic activity by adjusting rates, rather than the amount of money in circulation.
Photo: BBVA.
Their model also explains how inflation is formed and helps to respond more effectively to shocks that can alter the balance between supply and demand, and which can be restored through a stabilization policy that reduces or increases the latter.
“Its simplicity, combined with how well it adapts to reality, led to it being soon accepted by those responsible for economic policy in central banks and finance ministries. The model can also be refined and adapted to the circumstances of each country,” the Academy explained.
According to the former chief economist of the International Monetary Fund (FMI), Olivier BlanchardWoodford wrote “the bible.” Developing a new generation of dynamic general equilibrium models involved generalizing the assumption that markets are not perfectly competitive, introducing imperfect competition, and introducing delays in the adjustment of both prices and wages in the economy.
Thus, Hall and Woodford contributed to building a theoretical framework that combines the rational decisions of households and companies with the imperfections that exist in the markets. These include price rigidities and financial restrictions that prevent all consumers from adjusting their spending in the same way. This combination allows us to study why a change in interest rates can have effects on consumption, production and employment, and why these effects do not necessarily disappear immediately.
Woodford, born in 1955 in Chicopee, Massachusetts, is the John Bates Clark Professor of Political Economy at Columbia University in New York.
For his part, Hall, born in Palo Alto, USA in 1943, is a senior researcher at the Hoover Institution and Robert and Carole McNeil Professor of Economics at Stanford University after passing through the Economics departments of MIT and the University of California, where he obtained his doctorate and his master’s degree.
This recognition in Economics was created in 1968, when the Central Bank of Sweden, on the occasion of the 300th anniversary of its foundation, had the idea of financing a prize that is awarded on the same basis as those in medicine, physics, chemistry, literature and peace.
The winners will receive 12 million Swedish crowns (US$ 1.2 million) that will be divided equally between them.
Based on EFE and La Nación / GDA
Source: www.elpais.com.uy
