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STOCKHOLM (AP) -- American economists Robert E. Hall and Michael Woodford won the Nobel Memorial Prize in economics Monday for their work on models that have helped governments and central banks manage economic shocks, such as energy crises and inflation.
The Royal Swedish Academy of Sciences announced the winners in Stockholm, noting that their work created the theoretical foundation to better understand how consumers decide whether to save or spend, insights that make it easier for policymakers worldwide to stabilize economies after fluctuations.
"The laureates' research has made it possible to manage major macroeconomic crises far more effectively than before," the Nobel committee wrote in a paper explaining the economists' work. "It has been hugely beneficial during the pandemic and the energy crises of recent years."
Hall, 83, is affiliated with Stanford University in California. Woodford, who was born in 1955, is affiliated with Columbia University in New York.
Woodford spoke to the committee by phone from New York: "It's a tremendous honor. It's a surprise."
Hall also said the award was a "wonderful surprise."
"I've spent my career trying to understand how the economy works, following interesting questions wherever they led. When I thought I had a new idea, the next step was to find out whether it was actually new, whether it was right, and whether it mattered," he said in a statement released by Stanford.
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 interest rates and taxes and hiking government spending, thereby encouraging consumers and businesses to spend and invest and help restart growth.
"This is the Keynesian recipe and it worked well -- until it didn't," said Timo Boppart of the Nobel economics committee.
Policymakers had thought economic management involved simple trade-offs -- unemployment, for instance, would stay low at a time of high inflation and rise when inflation fell. But the "stagflation" of the 1970s -- when the world economy experienced simultaneous high inflation and high unemployment -- proved the formula was simplistic.
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.
"Economic outcomes are the result of millions of decisions made at the microlevel by households and businesses,'' the Nobel committee wrote. "Using models based upon this approach, rather than simply studying the economy from a macro perspective, like a bird's eye view," Hall and Woodford's research "generated a paradigm shift in the theory of stabilization policy."