Nobel awarded for work to tame booms and busts
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A couple of smooth operators just won the Nobel Prize in economics: Stanford University’s Robert E. Hall and Columbia University’s Michael Woodford. According to the Royal Swedish Academy of Sciences, the two Americans’ work has helped policymakers smooth out the intensity of economic booms and busts, making financial shocks and crises easier to deal with.
Nobel-minded: After the 1970s energy crisis exposed inadequacies in 20th-century economist John Maynard Keynes’s policy prescriptions, Hall and Woodford each set about revising them through a microeconomic lens.Basically, they figured macroeconomics is important, but households and businesses are the ones actually making financial decisions that can drive booms and busts. They make those decisions based on what’s happening now and what they think is going to happen next.
Hall focused on how households make purchasing decisions (demand), while Woodward looked at how businesses set prices (supply).
The resulting research and economic models helped central banks, including the Federal Reserve, understand that forward guidance on interest rates can be useful to households—kind of like how a pilot’s midair announcements help passengers know whether to stretch their legs or buckle up and hold on to their ginger ales.
Put into practice: The laureates’ work on forward guidance and emphasis on the credibility of central banks were put to the test during the Covid pandemic, the 2008 financial crisis, and their aftermaths, as policymakers worked to file down the economy’s sharp peaks and troughs.—BC
