US economists Robert E. Hall and Michael Woodford received the Nobel Memorial Prize in economics. Their research has helped governments and central banks respond to economic shocks, including energy crises and inflation, or rising prices. The Royal Swedish Academy of Sciences announced the award in Stockholm.
Hall examined how people's expectations about future income affect their spending. People who feel optimistic spend more than those who feel pessimistic. However, new information can change these expectations unexpectedly, making future spending extremely difficult to predict. Woodford studied how businesses set prices. His work showed that their decisions depend partly on where they expect interest rates, which affect borrowing costs, to go.
Woodford's findings support clear, reliable communication from central banks about their thinking and plans. Banks such as the US Federal Reserve set short-term interest rates and have made greater efforts to explain their decisions. This approach is known as forward guidance. However, Kevin Warsh, the new Federal Reserve chair, believes it has gone too far. He is trying to reduce how much the bank says about its thinking and future actions.
