How Robert Hall & Michael Woodward's Nobel-winning insights reshape economic policy in times of crisis

Central banks now have a polished playbook about how to deal with economic crises. They lower interest rates, while governments raise budget deficits to ride out a downturn. These prescriptions have been around since the Great Depression in the US, when John Maynard Keynes and others demonstrated effectiveness of countercyclical government policy. But, then, the medicine stopped working. Oil shocks of the 1970s led to stagflation as policymakers attempted pump-priming economies.

Milton Friedman and monetarists argued against abrupt changes to money supply and budget deficits, and this became dogma for Reaganomics and Thatcherism. Robert Hall and Michael Woodward, winners of this year's Nobel Prize for economics, waded into this turbulent divide to show how countercyclical measures worked at the level of the individual. And this was the missing key for policymakers.

Hall examined how consumers are affected by expectations, and Woodward used these findings to explain how governments should go about pulling economic levers. They created a policy framework that puts the individual in the centre. This approach has survived over a considerable period during which the frequency of economic crises has climbed. Central banks now put as much effort into signalling their intent over interest rates as they do in changing them to smooth business cycles. More importantly, central banks now act in concert, which helps with managing global crises. Economic turbulence is rarely restricted within countries at current levels of globalisation. Consensus is vital for policy response, even if the shocks originate in political conflict.


Hall and Woodward did something more than heal a schism in macroeconomics by bridging it to microeconomics. Micro underpinnings have made the macro stronger. The duo showed policy is better designed from ground up. It has helped the world tackle the subprime crisis, Covid, and Ukraine and Iran energy disruptions. Central bankers have the right response to crises. Lawmakers must find better ways to avoid their causes.