New Keynesian economics came into its own in the wake of the Global Financial Crisis, and has provides the playbook for central banks' monetary policy decisions. So, it was fitting to see New Keynesianism recognised in the latest Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel (aka the Nobel Prize in Economics), awarded to Robert Hall (Stanford University) and Michael Woodford (Columbia University), "for microeconomic foundations of macroeconomic stabilisation".
The Nobel Prize Committee's citation noted:
Robert E. Hall and Michael Woodford are awarded this year’s prize in economic sciences for demonstrating how economic models could be reconstructed to revitalise stabilisation policy. Rather than basing the models on statistical links between macroeconomic variables, such as inflation, production and consumption, they chose to build them on a microeconomic foundation. This encompasses an understanding for how the total mass of individual households and businesses affect the economy through their actions.
Because I almost exclusively teach microeconomics, my students wouldn't necessarily recognise their work. However, the macroeconomics topics in ECONS101 include consumption functions as well as the role of expectations, both of which are key features of New Keynesian economics.
This year's award appears to have been very positively received, although as I noted in this post from last week, the prediction markets had different favourites in mind (as did I). Marginal Revolution has a series of posts (see here and here from Tyler Cowen, and here and here from Alex Tabarrok), and there is a good writeup in the Financial Times, especially noting the disconnect between Hall and Woodford's work and the practice of the current Fed Chair, Kevin Warsh.
As always, the Nobel Committee provided some excellent commentary in the form of a popular science summary of Hall and Woodford's work. That is well worth a read if you are not familiar with them.
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