US economists Robert E. Hall and Michael Woodford received the Nobel Memorial Prize in economics. The Royal Swedish Academy of Sciences announced the award in Stockholm. Their research helped governments and central banks manage economic shocks, including energy crises and inflation, or rising prices.
Hall studied how expectations about future income affect decisions to spend or save. People who expect better financial times tend to spend more. However, new information can change those expectations suddenly, making future spending very difficult to predict. Woodford examined business decisions, showing that companies consider future interest rates—the cost of borrowing money—when setting prices. They also consider expected changes in their costs and competitors’ prices.
Woodford’s findings support clear, believable communication from central banks about their plans. This practice, called forward guidance, helps explain how banks such as the U.S. Federal Reserve expect to act. Central banks have worked harder to explain their decisions in response to this insight. However, Federal Reserve Chair Kevin Warsh believes forward guidance has gone too far. He is trying to reduce how much the bank says about its thinking and intentions.
