Nobel memorial prize in economics awarded to Robert E. Hall and Michael Woodford

Economists' work has helped manage economic shocks, Royal Swedish Academy of Sciences says

American-born economists Robert E. Hall and Michael Woodford won the Nobel memorial prize in economics on Monday for their work on models that have helped governments and central banks manage economic shocks.

The Royal Swedish Academy of Sciences announced the winners in Stockholm, saying the two were being honoured for work that has helped policymakers deal with economic fluctuations.

"The laureates have helped us smooth out the economy's peaks and troughs," the academy said in a statement.

Hall is affiliated with Stanford University in California and Woodford with Columbia University in New York.

Woodford spoke to the committee by phone Monday from New York, saying: "It's a tremendous honour, it's a surprise."

The Nobel memorial prize in economics is announced in Stockholm on Monday. Hall and Woodford won the prize in for their work on models that have helped governments and central banks manage economic shocks. (Anders Wiklund/TT News Agency/The Associated Press)

"The laureates' work has provided us with a stable theoretical foundation for the models that are now used by central banks and governments around the world," John Hassler, chair of the Committee for the Prize in Economic Sciences, said in a news release.

"With them, we are better equipped to deal with shocks in the economy, such as energy crises or sudden changes in how much households consume."

'New foundation for stabilization policy'

For decades, governments responded to economic shocks by following the Depression-era prescriptions of the British economist John Maynard Keynes: intervene in the economy by lowering taxes and hiking government spending, thereby encouraging consumers and businesses to spend and invest themselves and help growth get restarted.

"This is the Keynesian recipe and it worked well — until it didn't," said Timo Boppart of the Nobel economics prize committee.

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Policymakers had thought economic management involved simple tradeoffs — unemployment, for instance, would stay low at a time of high inflation and rise when inflation fell.

But the "stagflation" of the 1970s — when the world economy experienced simultaneous high inflation and high unemployment — proved the formula was simplistic.

Hall and Woodford set about coming up with an improved model that took into account how consumers and businesses actually made decisions about whether to invest and spend.

"In separate contributions, Robert E. Hall and Michael Woodford helped build this new foundation for stabilization policy," Hassler said.

Last year, three researchers who study business innovation — including Canadian economist Peter Howitt — won for explaining how new products and inventions promote economic growth and human welfare, even as they leave older companies in the dust.

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The economics prize is formally known as the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel.

The central bank established it in 1968 as a memorial to Nobel, the 19th-century Swedish businessman and chemist who invented dynamite and established the five Nobel Prizes.

Nobel purists stress that the economics prize is technically not a Nobel Prize, but it is always presented together with the others on Dec. 10, the anniversary of Nobel's death in 1896.

Nobel honours were announced last week in medicine, physics, chemistry, literature and peace.

The prize money this year is 12 million Swedish kronor (about $1.7 million Cdn), whether for an individual, small group of laureates or organization.