A professor at the University of Poitiers, Taoufik Rajhi explains the Nobel Prize in Economics awarded to Robert Hall and Michael Woodford, who built the three-equation New Keynesian model twenty-five years apart (the tool central banks consult before every interest-rate decision, starting from the saving and spending choices of each household).
Why does this Nobel Prize in Economics honour two names rather than one?
starting with the decisions each of us makes, to understand the crises we all face
The jury chose to crown two economists who did not, in fact, work in the same era. Twenty-five years apart, Robert Hall and then Michael Woodford each laid a stone in the same edifice: the tool used today by central banks the world over, explains Taoufik Rajhi, a professor at the University of Poitiers.
What these two careers, built decades apart, have in common is a starting point you'll recognise in your own daily life: looking at the decisions each of us makes to understand the crises that affect everyone.
What really happens when a central bank announces its rates?
Behind every European Central Bank announcement on rates, whether a rise or a cut, lies a less visible but decisive tool: a mathematical model built around three equations. It’s this framework, not the official statement alone, that really shapes the decision before it’s ever made public.
This model has a name, "New Keynesian", and it didn’t come from nowhere: it’s largely the work of the two Nobel economics laureates. Understanding these three equations means understanding what’s really at stake when a central bank decides to move its rates, or not.
Does this prize change anything for households?
At heart, what unites the award-winning work can be summed up in one line: start from the decisions each of us makes to understand the crises we all face. This shift in perspective puts the household, and its choices around saving, spending or borrowing, at the centre of economic thinking, rather than treating it as a minor variable.
For you, as for every household, this prize changes nothing about your budget or your everyday decisions right now. In time, though, it could influence how central banks listen to and anticipate ordinary economic behaviour, should this approach take lasting hold in the way monetary policy is run.
Above all, this Nobel Prize tells the story of a shift in outlook: understanding economic decisions by starting with you, with your own choices about saving or spending, rather than reducing them to vast abstract variables. It's now up to central banks to carry this way of thinking, or not, into their next decisions, and up to you to stay alert to how their announcements, even when they don't touch your daily life right away, rest on a theoretical framework built from ordinary behaviour.
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