Photo: Contributed
By: Nghiinomenwa-vali Hangala
New macroeconomic models that have been found to improve countries’ ability to implement effective stabilisation policy have been developed by economists.
The models have been announced by the Royal Swedish Academy of Sciences as its award of the Sveriges Riksbank Prize (Nobel Prize) in Economic Sciences for 2026.
For 2026, the Nobel Prize in Economic Sciences has been awarded to Robert E. Hall, Stanford University, USA, and Michael Woodford, Columbia University, USA, for “Microeconomic Foundations of Macroeconomic Stabilisation.”
On the basis of their models, well-timed fiscal and monetary policy measures can reduce the economy’s peaks and troughs, the academy assessment revealed.
The economy is characterised by alternating downturns and upturns.
Ever since 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.
The Keynesian-prescribed measures did not reduce unemployment, but led to uncontrolled inflation instead, wrote the Swedish Academy.
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,” the academy wrote.
Hall and Woodford models have demonstrated how economic models could be reconstructed to revitalise stabilisation policy.
Rather than basing the models on statistical links between macroeconomic variables, such as inflation, production and consumption, they chose to build them on a microeconomic foundation.
This encompasses an understanding of how the total mass of individual households and businesses affects the economy through their actions.
A central component in these models is that households and businesses are forward-looking when making decisions about savings or product prices.
When governments and central banks communicate their plans for economic policy, they can influence this view of the future and move the economy in the right direction.
According to the Swedish Academy, since the new models’ introduction, “they have been extremely helpful in dealing with the economic downturns that have affected us.”
The Academy has stated that the laureates’ work has provided the world with a stable theoretical foundation for the models that are now used by central banks and governments around the world.
“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,” says John Hassler, Chair of the Committee for the Prize in Economic Sciences.
Fiscal and monetary policies are still some of the most significant policies; however, as realities change across economies, new approaches are required.
Economists are constantly researching and presenting new approaches to economic building.
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