The laureates have helped us smooth out the economy’s peaks and troughs.

This year’s laureates in the economic sciences, Robert E. Hall and Michael Woodford, have developed new macroeconomic models that have significantly improved our ability to implement effective stabilisation policy. On the basis of these models, well-timed fiscal and monetary policy measures can reduce the economy’s peaks and troughs. The economy is characterised by alternating downturns and upturns. Ever since the economist John Maynard Keynes launched his theories almost a century ago, stabilisation policy has been important for tackling these fluctuations. During recessions, the economy is boosted by reducing interest rates and increasing the budget deficit, while the opposite should be done to slow a booming economy. However, during the oil crises of the 1970s, it seemed that the Keynesian models that govern when and how measures should be implemented no longer worked. They did not reduce unemployment, but led to uncontrolled inflation instead. The West experienced a decade of low growth, high unemployment and high inflation. Many people believed that stabilisation policy had done more harm than good and that it should be retired.

Links:
Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2026