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\n\t\t\t\t<\/p>\n\n\t\t\t\tDuo overturned earlier economic assumptions\t\t\t<\/h2>\n<\/p><\/div>\n For decades, governments responded to economic shocks by following the Depression-era prescriptions of the British economist John Maynard Keynes: Intervene in the economy by lowering taxes and hiking government spending, thereby encouraging consumers and businesses to spend and invest and help restart growth.<\/p>\n
\u201cThis is the Keynesian recipe and it worked well \u2014 until it didn\u2019t,\u2019\u2019 said Timo Boppart of the Nobel economics committee.<\/p>\n
Policymakers had thought economic management involved simple trade-offs \u2014 unemployment, for instance, would stay low at a time of high inflation and rise when inflation fell. But the \u201cstagflation \u2019\u2019 of the 1970s \u2014 when the world economy experienced simultaneous high inflation and high unemployment \u2014 proved the formula was simplistic.<\/p>\n
Some economists argued that government attempts to intervene in the economy were doomed to fail. But Hall and Woodford, in separate contributions, set about improving the Keynesian model to take into account how consumers and businesses actually make decisions about whether to invest and spend.<\/p>\n
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\u201cEconomic outcomes are the result of millions of decisions made at the microlevel by households and businesses,\u2019\u2019 the Nobel committee wrote.<\/p>\n
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\u201cUsing models based upon this approach, rather than simply studying the economy from a macro perspective, like a bird\u2019s eye view,\u201d Hall and Woodford\u2019s research \u201cgenerated a paradigm shift in the theory of stabilization policy.\u2019\u2019<\/p>\n
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\n\t\t\t\t<\/p>\n\n\t\t\t\tHall studied consumer choices\t\t\t<\/h2>\n<\/p><\/div>\n Hall studied the way that consumer decisions about whether and how much to spend depend on what they expect their future income to be.<\/p>\n
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\u201cIf they are optimistic, they will consume more than if they are pessimistic,\u2019\u2019 the committee wrote. But consumer expectations can change unexpectedly as new information about the economy comes in. And some households are so poor they can\u2019t borrow or tap savings in response to economic changes.<\/p>\n
In a 1982 paper with the economist Fredric Mishkin, Hall found that around 80 per cent of households made spending decisions based on their expectations for the future \u201cwhile the rest lived hand to mouth,\u2019\u2019 the committee wrote.<\/p>\n
\u201cThe prize is for research that pushes our understanding of macroeconomics from the bottom up, from families and firms making decisions over time, while looking ahead,\u201d Ivan Werning, an economist at the Massachusetts Institute of Technology, said in an email.<\/p>\n
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\n\t\t\t\t<\/p>\n\n\t\t\t\tWoodford analyzed how businesses make decisions\t\t\t<\/h2>\n<\/p><\/div>\n Woodford\u2019s research established that businesses make decisions about prices based on where they think interest rates will go in the future.<\/p>\n
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\u201cIf the business believes that its competitors\u2019 prices and its own costs will increase, it is best to set a higher price than it would with the opposite expectation,\u201d the Nobel committee wrote. \u201cBusinesses\u2019 decisions are thus also governed by their expectations.\u2019\u2019<\/p>\n
Therefore, central banks such as the U.S. Federal Reserve, which set short-term interest rates, should provide \u201cclear and credible communication about how they reason and what they plan to do.\u2019\u2019 Central banks have responded to this insight by working harder to explain what they are doing.<\/p>\n
During the phone call broadcast at a news conference, Woodford said his work has stressed \u201cthe understanding of the people who are in the markets and making decisions about spending.\u201d<\/p>\n
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\n\t\t\t\t<\/p>\n\n\t\t\t\tEconomics prize is last Nobel announcement this year\t\t\t<\/h2>\n<\/p><\/div>\n The economics prize is formally known as the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel. The central bank established it in 1968 as a memorial to Nobel, the 19th-century Swedish businessman and chemist who invented dynamite and established the five Nobel Prizes.<\/p>\n
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Nobel purists stress that the economics prize is technically not a Nobel Prize, but it is always presented together with the others on Dec. 10, the anniversary of Nobel\u2019s death in 1896.
Monday\u2019s award was the second Nobel win for a Stanford University professor this year. Dr. Karl Deisseroth shared the medicine prize with Peter Hegemann and Georg Nagel for their work that led to a tool that uses light to help unravel how the brain works.<\/p>\n
The prize money this year is 12 million Swedish kronor (about $1.2 million), whether for an individual, small group of laureates or organization.<\/p>\n<\/p><\/div>\n
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