Royal Swedish Academy of Sciences Robert E. Hall and Michael Woodford have been awarded the Nobel Prize in Economics for their work on the microeconomic foundations of macroeconomic stabilization. The Nobel Memorial Prize in Economics was announced on Monday by the Royal Swedish Academy of Sciences in Stockholm. This prestigious prize, formally known as the Sveriges Riksbank Prize in Economic Sciences in memory of Alfred Nobel, is worth $1.2 million.

Highlighting the contribution of the American pair, Nobel He demonstrated how economic models can be re-engineered to restart stabilization policies, the prize committee said. Instead of basing the model on statistical links between macroeconomic variables such as inflation, production and consumption, they decided to build them on a microeconomic basis.

Last year, three researchers studying business innovation explained how new products and inventions spur economic growth and human well-being, even when they leave behind legacy companies.

Focus on macro-economic models

This year’s prize in economics is the Robert E. Hall and Michael Woodford are credited with showing how economic models can be reworked to support stabilization policies. Instead of basing the model on statistical links between macroeconomic variables such as inflation, production and consumption, they decided to build them on a microeconomic basis. This includes understanding how the actions of individual households and businesses affect the economy as a whole.

A key part of these models is that households and businesses think ahead when making decisions about savings or production costs. When governments and central banks announce their plans for economic policy, they can influence this vision of the future and steer the economy in the right direction.

A helpful model for coping with economic crises

Since the introduction of new models, they have been very helpful in dealing with the economic downturn that has affected us. John Hassler, chairman of the Economics Prize Committee, said the winners’ work gave us a strong theoretical basis for a model that is now used by central banks and governments around the world. With them, we are better prepared to withstand shocks to the economy, such as an energy crisis or sudden changes in household consumption.