Nobel Prize in economics 2026 goes to Robert Hall and Michael Woodford for the New Keynesian models central banks use to fight recessions and inflation

Most Nobel prizes in economics reward an idea that changed how economists think. This year's rewards an idea that changed how central banks talk. When a Federal Reserve chair tells markets where interest rates are likely to be next year, or a finance ministry models how a fuel-price shock will ripple through wages and prices, the machinery underneath is largely the work of the two Americans named on Monday: Robert E. Hall of Stanford University and Michael Woodford of Columbia University.

The Royal Swedish Academy of Sciences awarded the pair the 2026 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for what it called the "microeconomic foundations of macroeconomic stabilisation". They will share 12 million Swedish kronor, about $1.2 million. The academy credited them with "a paradigm shift in stabilisation policy" and said the New Keynesian models that grew out of their research "are now used by central banks and finance ministries 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." — John Hassler, chair of the Committee for the Prize in Economic Sciences

The recipe that stopped working

To understand why the prize matters, start with the failure it answers. After the Great Depression, John Maynard Keynes persuaded governments that they could lean against the business cycle — stimulating demand in a slump, cooling it in a boom. For a generation, policymakers ran that playbook using statistical relationships between big aggregates: inflation, output, unemployment, consumption.

"This is the Keynesian recipe, and it worked well until it didn't," Tim Boppart, a member of the prize committee, told NPR. In the 1970s, oil shocks delivered high inflation and high unemployment at the same time — stagflation — a combination the old models said should not persist. Prescriptions that once worked, such as cutting rates and widening deficits to fight unemployment, appeared to make inflation worse without fixing jobs. In Boppart's words, "The Keynesian recipe was shattered."

The problem was that the old relationships were not laws of nature. They were averages of millions of decisions by households and firms, and those decisions changed once people started expecting inflation. A model built on the averages could not tell policymakers what would happen when the public's expectations moved.

Hall: households look ahead

Hall attacked the demand side. In a 1978 paper in the Journal of Political Economy, he showed that if consumers are forward-looking and spend according to what they expect to earn over their lifetimes, then consumption should behave like a random walk: changes in spending should reflect only new information about the future, not last quarter's income. The paper became the basis for what economists call the Euler-equation approach to consumption, which sits at the heart of modern macroeconomic models.

Boppart put the intuition simply: "If consumers see dark clouds on the horizon, they cut back on consumption already today." That insight explains why a credible warning of recession can itself cause one, and why a credible promise of support can blunt one before it begins. Hall is also the economist who coined the division between "freshwater" economists at inland universities such as Chicago, who favour free markets and rational expectations, and "saltwater" economists on the coasts, who tend to believe governments and central banks can usefully manage demand.

Woodford: firms set prices for the future

Woodford built the supply side and then assembled the whole machine. Because changing prices is costly, firms set them with an eye on where costs and demand are heading, not just where they are today. Expectations of future inflation therefore feed directly into today's prices. Woodford combined that insight with forward-looking households and a rule for central-bank interest rates into a complete framework — set out in his 2003 book Interest and Prices: Foundations of a Theory of Monetary Policy — that became the standard three-equation New Keynesian model.

The book also shifted monetary economics away from the quantity of money and towards the price of borrowing, and popularised the idea of a "natural" rate of interest that central bankers now routinely estimate. The Guardian noted that the framework was used by policymakers after the 2008 financial crisis as they steered the global economy away from the risk of a second Great Depression.

In plain terms, the three equations describe a loop. Households decide how much to spend today based on the interest rate and on what they expect to earn tomorrow. Firms set prices today based on what they expect costs and inflation to be tomorrow. The central bank sets the interest rate in response to both. Because every link runs through expectations, a central bank that can shift what people believe about the future can move spending and pricing now, sometimes without moving rates at all. That is why the academy said well-timed fiscal and monetary measures, built on these models, "can reduce the economy's peaks and troughs".

Woodford, who told reporters gathered in Stockholm by phone that he was "elated" and that the prize was "a surprise", described the core lesson in terms any central bank press office would recognise. "One of the themes in my work is that government authorities shouldn't view stabilization of the economy as an exercise that is simply conducted by people pulling levers to control the economy, independent of what people in the economy understand," he told reporters.

Forward guidance, and its critics

That lesson has a name: forward guidance. If households and firms decide based on the future, then what a central bank says about future policy can be as powerful as what it does today. After 2008, and again during the pandemic, when interest rates sat near zero and could not be cut further, central banks leaned heavily on promises about how long rates would stay low.

The tool has its detractors, and one of them now runs the world's most important central bank. Kevin Warsh, the current chair of the Federal Reserve, has argued that forward guidance should play only a "limited and circumscribed" role in normal times, to avoid "creating ambiguity in the name of clarity", according to the Guardian. In 2014, Mark Carney, then governor of the Bank of England, was mocked as an "unreliable boyfriend" after hinting at rate rises that did not arrive. Guidance only works if it is believed, and it is believed only as long as it proves right.

The broader models have long-running critics too. A frequent complaint about the New Keynesian framework in its standard form is that it said little about banks and financial markets, the very channel through which the 2008 crisis spread. Much of the research since has gone into adding those pieces. The academy's citation is, in effect, a judgement that the foundation was sound even where the building needed extensions.

Why this year

Hassler's reference to "energy crises" was not abstract. The award comes in a year in which the war involving Iran, which began with US and Israeli airstrikes on February 28, has disrupted oil flows through the Strait of Hormuz and pushed fuel prices up around the world. Central banks are again facing the question that broke the old Keynesian models: how to respond to a supply shock that raises prices and threatens growth at the same time. The answer their models give depends heavily on whether the public expects the inflation to last — the variable Hall and Woodford put at the centre.

Hall, born in California, and Woodford, born in Massachusetts, continue a long American run in the prize, which was established by Sweden's central bank in 1968 and first awarded in 1969. Only three women have won it, most recently Claudia Goldin in 2023. Last year's prize went to Joel Mokyr, Philippe Aghion and Peter Howitt for work on innovation-driven growth. The economics award is the last of the season, following the Peace Prize to South African jurist Navi Pillay and the Literature Prize to Canadian poet Anne Carson.

The durable point of this year's prize is that modern economic policy is, to a large degree, the management of beliefs. Interest rates and budgets still matter, but they work through what millions of people think will happen next. Hall showed that households spend on that basis; Woodford showed that firms price on it, and built the model that central banks use to influence it. Every time a policymaker chooses their words carefully, they are applying the work that won on Monday.

This report is based on the Royal Swedish Academy of Sciences' announcement and statements by prize committee chair John Hassler and committee member Tim Boppart, as reported on October 12, 2026 by CNBC, the Guardian, Al Jazeera and NPR, together with published records of Hall's 1978 Journal of Political Economy paper and Woodford's 2003 book. The dollar value of the prize is an approximate conversion. Characterisations of criticism of the New Keynesian framework summarise a long-running academic debate rather than any single source.