Michael Woodford and Robert Hall, the American economists who won the 2026 Nobel Prize in Economics this Monday, have participated in activities at the Central Bank of Chile (BCCh), according to Emol. The outlet also reports that their ideas influence how economic policy is assessed in the country.
The Royal Swedish Academy of Sciences, the institution that awards the prize, honored them "for the microeconomic foundations of macroeconomic stabilization". Put simply, they explained the entire economy by starting with how families and businesses make decisions.
The context helps explain this. In the 70s, amid the oil crises, Keynesian models (those that inspired postwar economic policy) stopped making accurate predictions. Hall and Woodford rebuilt them from the ground up, taking into account that households and businesses think about the future when saving or setting prices.
This is where the practical implications come in. If people act on their expectations, announcements by a government or central bank also move the economy. John Hassler, chair of the Nobel committee, said that thanks to them "we are better prepared to face shocks", such as energy crises or abrupt shifts in consumption.
Woodford teaches at Columbia University and wrote "Interest and Prices" (2003). According to the committee, the three-equation New Keynesian model he proposed in that book served as a template for those developed later.
His central idea is that inflation depends less on how much money is circulating and more on the gap between the central bank's interest rate and the neutral rate. That is the rate that neither speeds up nor slows down the economy, like a car coasting in neutral on level ground.
Woodford added another key point: what people believe will happen to the interest rate matters more than its level today. This gives rise to inflation targets and the importance of central banks communicating well. "All modern central banks, especially those that follow inflation targets, owe a great deal to Mike," José De Gregorio, former president of the BCCh, told El Mercurio.
Sergio Urzúa, a professor at the University of Maryland and researcher at CLAPES UC, explained this in a letter to El Mercurio. In his view, a central bank exerts influence mainly through the path of interest rates that people anticipate, which is why credible rules and transparency matter.
The ties to Chile are concrete. In November 2015, Woodford co-organized the BCCh's XIX Annual Conference in Santiago with economists Elías Albagli and Diego Saravia, where he spoke about quantitative easing (large-scale bond purchases by the central bank) and financial stability.
In June 2019, the minutes of the Monetary Policy Report (IPoM) used his definition in one of the methods for calculating the neutral rate. That same year, he published a study in the American Economic Review with Mariana García Schmidt, now head of Economic Research at the BCCh, whom he supervised during her doctorate.
Hall, a professor at Stanford, contributed through his work on consumption. In 1978, he published an article in the Journal of Political Economy arguing that families spend with their lifetime income in mind, rather than this month's salary. They adjust spending only in response to surprises, such as a layoff or an unexpected pay raise.
If your spending rises and falls with each paycheck, the model would say you live "hand to mouth", without savings or credit. Former Finance Minister Felipe Larraín explained to El Mercurio that Hall combined Milton Friedman's permanent income theory with rational expectations.
In Chile, the idea did not hold up entirely well. In 2004, Claudio Soto, then an economist at the Central Bank and now a board member, found that lagged unemployment and monetary policy interest rates did help predict consumption growth.
Hall also visited the central bank. In 2012, he commented on a paper by Robert Shimer at its annual conference, and in January 2021, he spoke about unemployment at a meeting on the pandemic. Sofía Bauducco, manager of Economic Studies at the BCCh, described him as "one of the central figures in modern macroeconomics".
Both will receive the prize of 12 million Swedish kronor at the ceremony on December 10 in Stockholm.
