Nobel Economics Laureate Woodford: "Communication Is Key to Government Economic Stabilization" (Comprehensive)

At Award Announcement Press Conference
Economic Actors' Policy Expectations Shape Consumption
Demonstrated the Effectiveness of Forward Guidance During the Financial Crisis
Warned of Energy Shocks from the Middle East War

"The government should not view economic stabilization policy simply as pulling levers to control the economy."

Michael Woodford, 71, a professor at Columbia University in the United States who was named a co-recipient of this year's Nobel Prize in Economic Sciences, made the remarks by phone on the 12th (local time) during a press conference announcing the award, hosted by the Royal Swedish Academy of Sciences. "The actual effects of policy depend greatly on how people making decisions about spending and other matters in the market anticipate and understand future policy," he said. "Policy should not be conducted without regard to how economic actors understand the authorities' policies."

Nobel Prize-winning economist Michael Woodford prepares to give an exam in his class in New York, U.S., on the 12th (local time). AP-Yonhap News

Professor Woodford will share the prize with Robert E. Hall, 83, a professor at Stanford University, for laying the microeconomic foundations of macroeconomic stabilization. The laureates demonstrated that consumption and investment can vary depending on whether people believe low interest rates will persist or expect rates to rise soon, even if a central bank has decided to cut rates. Professor Hall found that household consumption is determined by "expectations of future income." Professor Woodford conducted research showing that because companies are reluctant to change the prices of their products, they do not adjust prices easily; instead, when they do adjust them, they take into account their outlook for future inflation. If economists who examine the macroeconomy through relationships among indicators such as "consumption rises as income increases, and prices rise as unemployment falls" are considered traditional Keynesians, the laureates are classified as "New Keynesian" economists because they combine this approach with the micro-level decision-making of individual economic actors.

"It is also important to develop a theoretical framework that enables the government to explain to the public what policies it is implementing and communicate with them," Professor Woodford said. "That was one of the main goals behind my efforts to develop an analytical framework." He cited central banks' response to the 2008 global financial crisis as a prominent example of his research being applied to actual economic policy. At the time, central banks in major countries, including the United States and Sweden, lowered benchmark interest rates to virtually zero. However, high unemployment and weak demand persisted. With further rate cuts difficult, central banks used forward guidance to signal the direction of future interest rate policy in advance, thereby stimulating market expectations and supporting the economy.

"This involved explaining more explicitly the path that future interest rate policy would take, and was different from relying solely on further immediate rate cuts," Professor Woodford said. "It did not magically solve every problem, but I think it made an important contribution to economic stabilization." His remarks drew particular attention as they contrasted with the decision by U.S. Federal Reserve (Fed) Chair Kevin Warsh to end forward guidance at his first Federal Open Market Committee (FOMC) meeting after taking office.

Professor Woodford identified the war in the Middle East as a threat to the stability of the global economy. "Events that do not stem from economic causes often have a very significant impact on the economy," he said. "A clear example right now is that the war in the Middle East is disrupting global energy markets." He added, "Major changes in energy prices affect many other sectors of the economy, and this is happening across regions around the world." He was warning that energy price shocks caused by the war in the Middle East could spread across the global economy.

He gave a positive assessment of China's advances in artificial intelligence (AI). "China appears to have rapidly emerged as a leader in technology, including AI," Professor Woodford said. "China could make a major contribution to global economic development over the coming decades."

After receiving the Nobel Prize in Economic Sciences, Professor Woodford said, "It is a tremendous honor. I did not expect it, but I am truly delighted." He learned of the award at around 4:30 a.m. while asleep. He reportedly also attended to a scheduled student exam and departmental duties on the day the award was announced.

Professor Hall, who was named a co-recipient, said through Stanford University, "I have devoted my entire research career to understanding how the economy works. This is a wonderful surprise." He also thanked his wife, economist Susan Woodward, who has co-authored papers with him, and said, "I would also like to congratulate Professor Woodford, who has taught me a great deal."

This content was produced with the assistance of AI translation services.