Dear All:

Well, who won?

The Nobel Prize for Economic Sciences for 2026 was announced today, October 12, 2026. It went to Michael Woodford and Robert Hall.  

Woodford is 71 years old and was born in Chicopee, Massachusetts.  He obtained his  B.A. in economics from the University of Chicago, his law degree from Yale Law School, and his Ph.D. in economics from the Massachusetts Institute of Technology.  His Nobel-winning work was primarily done while a professor at the University of Chicago.  He is currently the John Bates Clark Professor of  Political Economy at Columbia University

Hall is 83 years old and was born in Palo Alto, CA.  He obtained his BA in economics from UC Berkeley and a Ph.D. in economics from Massachusetts Institute of Technology.  He published his Nobel-winning work around the time he started working at Stanford University.  He is currently the Robert and Carole McNeil Joint Senior Fellow at the Hoover Institution, and Professor of economics at Stanford University 

The prize was given to them  “for microeconomic foundations of macroeconomic stabilisation.”

So what did they do to make them so Noble?

There is no doubt that macroeconomics affects us all.

Imagine that oil prices rise, but your income stays the same. You can afford less. Now imagine that your grocery bill triples in just three years. Again, you can afford less. Or imagine a government or central bank that follows populist policies and allows inflation to spiral out of control. The result can be devastating for families and the entire economy.

Sometimes, these economic problems come from events beyond our control, such as the COVID-19 pandemic in 2020. Sometimes, they result from our own decisions, such as excessive government spending or war. And sometimes, they happen because policymakers do not understand how to respond to a crisis. The Great Depression of the 1930s is a famous example. It is this last problem that economists hope to prevent.

Over the past 50 years, economists have become much better at understanding how economies respond to unexpected events. One reason is that they have developed better models of how people behave and how they react to government policies.

Let’s consider a simple example. Suppose the government sends everyone a check for $1,000. Is this a good idea or a bad idea? The answer depends, in part, on what people do with the money.

Will they spend all of it? Will they save some of it? Will the extra spending push prices higher? And what if people expect prices to rise in the future? They might spend more today to get ahead of those price increases—or save more because they are worried about the future.  Will they work more or will they work less?

People do not always think far ahead, but their expectations about the future influence their decisions. And those decisions influence what happens to the economy.

To understand what a government policy will do, economists must understand how people are likely to respond to it. Economic models help economists think through these responses and predict the possible consequences of different policies. Without such models, governments risk making decisions without understanding their full effects.

MICHAEL WOODFORD

Suppose a government notices something interesting: whenever inflation is high, unemployment tends to be low. And whenever inflation is low, unemployment tends to be high. The government hires the Lord Chief Economist (a joke borrowed from The Mikado, in which Lord Pooh-Bah holds a rather impressive collection of titles). The economist advises the leader: “Just print money! You’ll get lower unemployment, and everyone will be happy.”

Robert Lucas explained why this plan would not work in the long run. People are not stupid. Eventually, they figure out what is happening and adjust their behavior. Workers ask for higher wages or work less, businesses raise their prices, and the initial benefits of the policy disappear. The government cannot simply rely on a relationship it has observed in the past and assume that it will continue when policy changes.

This insight helped transform macroeconomics. Economists began building models that explicitly account for how individuals make decisions and respond to government policies. If an economist wants to understand what happens when oil supplies suddenly fall, for example, it is not enough to look at what happened after previous oil shocks. The economist must also consider how consumers, workers, and businesses will respond, taking their expectations about the future into account.

One important development was the creation of real business cycle (RBC) models. These models attempted to explain economic fluctuations by examining how individuals and businesses respond to changes in the economy.

The original models generally assumed that markets worked well and that people and businesses made decisions in competitive markets. But what if markets do not work perfectly? What if prices and wages do not adjust immediately, or other market imperfections prevent the economy from reaching its ideal outcome?

Michael Woodford, working with Julio Rotemberg, helped develop models that incorporated these kinds of imperfections and gave government policy a potential role in stabilizing the economy. Their work helped bridge the gap between models built on individual decision-making and the Keynesian idea that government intervention can sometimes improve economic outcomes. 

This was an important step toward the modern macroeconomic models used by central banks and policymakers today. The key insight is that we need both: a realistic account of how people make decisions and an understanding of why markets sometimes fail to deliver the best outcomes.

ROBERT HALL

One of the important ideas in economics is that people do not make spending decisions based only on how much money they earn today. They also consider how much money they expect to earn over their lifetimes.

Franco Modigliani and Milton Friedman helped develop this way of thinking about consumption. Their theories suggested that people try to smooth their spending over time rather than simply spend more whenever their current income rises.

Robert Hall was one of the early economists to develop ways to test these ideas using real-world data. He wanted to understand how consumers actually respond when their incomes change. If someone receives a temporary bonus, for example, do they spend most of it immediately? Or do they save much of it because they know their income will soon return to normal? What happens when the increase in income appears permanent?

Hall developed a particularly influential approach to studying these questions. His work helped economists test whether consumer behavior was consistent with the idea that people look ahead and make spending decisions based on their expected future resources, rather than simply reacting to today’s paycheck.

Since then, colleagues of mine, including Jonathan Parker, have shown that actual consumer behavior can be more complicated. Many people do not behave like the perfectly forward-looking consumers in simple economic models. They may focus heavily on the present, struggle to plan for the future, or respond differently depending on their circumstances.

In other words, consumers sometimes behave more like people at a bar on Sunday than like the perfectly rational planners imagined in economic models!

This does not discredit Hall’s work. Rather, it raises an important question: How rational and forward-looking are people in practice? Understanding the answer matters enormously when economists try to predict how consumers will respond to tax cuts, government payments, interest-rate changes, or an economic crisis.

Finally, although it was not highlighted in the Nobel Prize discussion, Hall also made important contributions to empirical growth economics. His work on productivity and the differences in output per worker across countries is another area I have always found particularly interesting and relevant. It reminds us that macroeconomics is not just about recessions and inflation; it is also about understanding why some economies become much richer than others.

So what about the Nobel choice?

Most graduate students of macroeconomics have studied intensively the work in consumption, including the work of Bob Hall.  In fact, two of my classmates went on to make a career in studying consumption and are now professors at MIT and Wharton. 

Personally, I had the pleasure of working with both Michael Woodford and Julio Rotemberg on one of their influential papers. I was a novice at the time, but I had to learn the equations and concepts of real business cycle (RBC) models quickly. I was responsible for devising and programming all of the simulations used in these models. You can find that work here, although the conversion from my old word-processing program introduced some typos.

The Nobel Committee’s discussion seemed to suggest that Julio Rotemberg might also have received the Nobel Prize had he been alive. He died of cancer in 2017, at a tragically young age. I will always remember how much fun it was to work with both Woodford and Rotemberg.

I also remember Woodford joking that my email address must have been inspired by the Luddites in Britain.  Another memory stands out. While working on their paper, I found what I thought was an error and brought it to Julio’s attention. He responded, “Michael Woodford never makes an error.” As it turned out, Julio was right: the error was in another paper that everyone was using. It was essentially a typo, but because the simplification had become so widely used, we needed to correct it in our own paper.

Julio was initially skeptical of my concerns about the other paper as well. But when I confronted its author, he acknowledged that I was right. That experience left me with even greater respect for this author. It was a small episode, but one that has stayed with me as a reminder of the intellectual rigor and integrity that make great researchers so admirable.

Someone asked me today two questions: “What did they really contribute?” and “Does the press even understand this, or will they just spin it?”  My answer to the first question is that they made macroeconomic models better by focusing on how individuals respond to economic policy.  My answer to the second is less optimistic: the press will spin it. Even I, having run the simulations for one of Woodford’s papers, find it difficult to explain all the details. If it is hard for someone who has worked directly with the research to explain it, imagine how difficult it is to convey its significance in a short news story.

So is that it?

Another well known macroeconomist said “This is where I often part company with the standard approach. I think the equation is fundamentally wrong because it assumes a degree of foresight that people simply do not have. Unfortunately, this is not just a theoretical quibble; it has non-trivial implications for how we conduct economic policy.  One can argue that the unreconstructed Euler equation is still a useful benchmark. Perhaps. But when the benchmark departs so radically from reality, it can do more harm than good. A benchmark is supposed to help us understand the world, not lead us to misunderstand it.”

Kenneth Rogoff, Maurits C. Boas Chair of International Economics at Harvard University, said the following:

“My review of Mike’s book at the time said it was the most important contribution since Patinkin, and I think I got that right. What Mike did masterfully was figure out a host of special simplifying assumptions that allow one to get a neat solvable dynamic model in a way that had previously seemed impossible.  These include having complete asset markets (so the only friction is sticky prices or wages) as well as having a tax/subsidy scheme to alleviate monopoly distortions.  He was also very early on in realizing that Fed’s main instrument is the short-term interest rate and not money supply; this seems obvious now but was the convention at the time in theoretical work, though of course John Taylor had shown earlier that this is how central banks actually operate.  Of course, there are limitations to this analysis for understanding financial crises, and much subsequent work has tried to solve that, though it is not easy. 

On Bob Hall, his influence on a generation of young economists cannot be overstated.   And perhaps Robert Barro could have been included in this award.”

Another well-known economist who asked not to be quoted mentioned that he felt Robert Barro should have been included.  He also said that the elasticity of substitution in practice makes the use of these models less effective.

Gregory Mankiw said “Both Hall and Woodford are highly deserving”.  

Finally, another well respected economist said “…when I taught undergraduate macro in the 1970s at [left intentionally blank] many many years ago, I taught microfoundations then.   There were lots of papers with such analyses…seems like a stretch to credit with microfoundations of macroeconomics…”

So why might the Nobel Committee be so interested in this question?  Over the last five years, inflation in Sweden has been 23% and in Europe as a whole, it has been 26%.  We have seen the same in other parts of the world.  Although most people in Sweden have experienced real growth in income, the poorest have not.  And the richest have experienced the most.  In recent years, probably due to the Trump tariffs, the Swedish trade balance has worsened, although still positive.  This means a lot to a country like Sweden, who’s trade represents a large part of GDP.  As I mentioned in the beginning, macroeconomics matters to all of us.

For more information on the winners:

Nobel Committee #1

Nobel Committee #2

From Stanford:  

From Columbia: 

From MIT:

Congratulations to Woodford and Hall for their fruitful pursuit of knowledge, and the other armies of researchers who walked with them!

Happy Columbus Day!

Ludwig

P.S. Feel free to email me your thoughts and indicate whether you wish them to remain anonymous or not.  For those are curious about how I computed the Swedish statistics, I used an AI program.

P.P.S.  Don’t forget to watch the Silk Nobel Lecture series and sign up for future notifications.  Silk Lecture Videos & www.usfnobel.com 

October 12, 2026