Expectations shape how monetary policy stabilizes the economy
Robert E. Hall and Michael Woodford received the 2026 Nobel Prize for Economics for research on expectations and stabilization policy, according to an October 21, 2026 Bank of Spain blog post. Their work underpins central bank models.
Future income meets future rates
Robert E. Hall of Stanford University and Michael Woodford of Columbia University, both US citizens, received the award for complementary contributions to macroeconomics.
Hall showed in 1978 that households adjust consumption when new information changes expectations of future income, not simply when current income changes.
His labor-market research explains how job-search and hiring frictions can sustain unemployment during recoveries.
Woodford showed that monetary policy works through both current interest rates and expectations of their future path.
Households adjust spending and saving, while firms adjust investment and prices.
Central bank communication therefore affects decisions today by shaping expectations about policy tomorrow.
From Keynes to inflation targets
John Maynard Keynes's General Theory of 1936 established a role for demand management.
Stagflation following the 1970s oil crises prompted greater attention to individual decisions and expectations.
New Keynesian models added rigidities and frictions; the 2007–2008 financial crisis and later inflation episodes increased attention to finance, risk and uncertainty.
Woodford's framework supports interest-rate rules and explicit inflation targets.
Both laureates' ideas underpin central bank models of inflation, growth and monetary transmission.
Policy reaches beyond today's rate
The research places expectations inside the monetary transmission mechanism, rather than treating communication as an accessory.
Policy affects current decisions through anticipated future conditions as well as today's rates.
The blog identifies credibility as central to that mechanism.