2026 Economics Nobel: How to keep an economy stable using policy tools

The Royal Swedish Academy of Sciences has awarded the 2026 Sveriges Riksbank Prize in Economic Sciences to American economists Robert E Hall of Stanford University and Michael Woodford of Columbia University. The duo will share a prize of 12 million Swedish kronor for their work on the microeconomic foundations of macroeconomic stabilisation.

Macroeconomic stabilisation refers to government and central bank policies aimed at stabilising an economy. This often involves measures like raising or lowering interest rates and adjusting tax rates to control inflation and stimulate economic growth. For example, the Reserve Bank of India recently increased interest rates to curb rising inflation due to factors such as crude oil price hikes and El Nino-induced food price increases.

The prize recognises Hall and Woodford's efforts to refine modern macroeconomic policies. Their work built on Keynesian economics, which advocates for government intervention in the economy during periods of high unemployment or inflation. However, during the 1970s, a period of high inflation and unemployment, this approach was questioned, leading to a reevaluation of Keynesian principles.

Hall and Woodford's research provided a more grounded, empirical foundation for Keynesian economics. They examined household and firm behaviours, such as how people decide on consumption and how businesses set prices. Their findings helped to better understand and implement government interventions, ultimately making Keynesian economics a more robust tool for stabilising economies.