The Nobel Prize awarded to Hall and Woodford bridges the gap between microeconomics and macroeconomics

The 2026 Nobel Prize in Economics, awarded to Robert E. Hall (Stanford) and Michael Woodford (Columbia University) for their contributions to the microeconomic foundations of macroeconomic stabilisation, is both timely and unconventional.

The award winners could not be more different. “Woodford is a cathedral-builder, laying stone upon stone. Hall is an intellectual butterfly, always seeking new perspectives,” wrote Olivier Blanchard. The former has built an impressive theoretical framework; the latter has produced insights capable of changing the way economists view specific problems. Yet both have helped to bridge a divide that has run through the discipline for decades: that between microeconomics, which studies the choices of individuals and firms, and macroeconomics, which deals with broad aggregates, from national income to inflation.

In the 1970s, macroeconomic models struggled to explain phenomena such as stagflation. It was not enough to observe the statistical relationships between variables: it was necessary to understand how expectations were formed and how economic agents reacted to the decisions of governments and central banks.

Hall, the elder of the two, focused primarily on consumption. He began with two ideas: that of Milton Friedman, according to whom households decide how much to spend on the basis of permanent income – that is, the resources they expect to have over time – and that of rational expectations, developed by Robert Lucas and others. Hall brought these together: if consumers make use of all available information, foreseeable changes in income should already be factored into their choices. Consumption, therefore, should only change when unexpected news arrives. For example, if we know we will receive a pay rise in January, we can start spending more as early as today; when the pay rise actually arrives, there will be no reason to change our habits again. Consumption follows a sort of ‘random walk’: its future trend depends primarily on the new information we receive as we go along. Hall has worked on many other topics and is also co-author, with Alvin Rabushka, of a proposal for a flat tax that has inspired tax reforms in several countries.

Woodford, a dozen years his junior, wrote the modern bible of monetary policy, "Interest and Prices", published in 2003, whose title echoes the work of Knut Wicksell (1898). The book provides a rigorous theoretical framework for understanding how central banks influence the economy through interest rates, expectations and the communication of their decisions. The starting point is that it is not only the level of interest rates that matters, but also their relationship with the ‘natural’ interest rate, which is consistent with an economy in equilibrium without inflationary pressures. If the rate set by the central bank is lower, credit tends to become more affordable and demand is stimulated; if it is higher, the opposite occurs. However, the effects also depend on how households and businesses expect prices and interest rates to evolve.

This is where price rigidity comes into play. Firms cannot, or do not wish to, change their prices constantly: they set them partly on the basis of what they expect to happen in the future. If conditions change, prices may adjust slowly, whilst production and employment react immediately. The output gap – the difference between actual and potential output – also helps to explain these dynamics: a shock, such as an unexpected rise in energy prices, can alter the economy’s productive capacity and complicate the Central Bank’s task.

One consequence is that the Central Bank should also explain how it intends to respond to future developments, so as to guide expectations. This is known as ‘forward guidance’, which has become an important tool, particularly since the 2008 financial crisis. But this is precisely where the Nobel laureate’s paradox emerges. Following the pandemic, many central banks, including the ECB and the Fed, have changed course, choosing not to unduly influence market expectations and thereby depriving themselves of the freedom to react to new information.

Hall and Woodford’s findings are open to debate, as is any economic theory; the method that made them possible is far less so. Macroeconomics cannot simply treat the economy as a black box, searching for correlations between broad aggregates. It must start with the decisions of those who consume, invest, produce and set prices. This is the bridge that the two Nobel laureates have helped to build.