What if you were told that what people think will happen in the future can affect the economy today?

This is one of the important ideas behind the 2026 Nobel Prize in Economics, awarded to two American economists, Robert E. Hall and Michael Woodford.

Their research, “Microeconomic foundations of macroeconomic stabilisation”, helps explain how governments and central banks can reduce the effects of recessions, unemployment, and inflation.

But what does this actually mean?

Understanding the big picture

In IGCSE Economics, we study two important aspects of the discipline:

• Microeconomics examines the decisions made by individuals, households, and firms.
• Macroeconomics examines the performance of the whole economy, including measures such as inflation, unemployment, and economic growth.

Although we study these topics separately, they are closely connected in reality. After all, the global economy is made up of billions of people and firms making decisions every day.

Why do expectations matter?

Imagine that you hear news suggesting the economy might enter a recession next year.

Even though your parents have not lost their job or experienced a fall in their income, they might decide to save more money and spend less.

Now imagine thousands or millions of households doing the same thing.

Consumer spending in the economy is then likely to fall, reducing the total demand for goods and services. Firms might respond by cutting production, delaying investment, or even employing fewer workers.

The interesting point is that these changes could begin before the recession actually happens!

This is where the research of Professors Hall and Woodford becomes particularly important.

Robert E. Hall helped economists understand that households make spending and saving decisions based partly on what they expect to happen to their income in the future.

Michael Woodford helped explain how expectations influence firms' pricing decisions and how central banks can use interest rates and communication to influence the level of economic activity.

For example, if a central bank announces that interest rates are likely to increase or remain high, households and firms might become less willing to borrow and spend. All things being equal, this could reduce total demand and discourage growth. However, the actual effects depend on whether people believe the central bank's announcement and therefore how they respond.

The work of Hall and Woodford has helped develop economic models used by central banks and governments when deciding how to respond to economic problems.

What does this mean for IGCSE Economics?

The research from professors Hall and Woodford connects directly to several topics in our syllabus:

• Topic 3.2.1 The influences on spending, saving, and borrowing - Why households change their spending decisions.
• Topic 4.3.2 Monetary policy measures -  How interest rate policy influences borrowing, saving, and spending.
• Topic 4.5 Economic growth - How household and business decisions influence economic activity.
• Topic 4.6 Unemployment - How falling total demand in an economy can reduce firms' need for workers.
• Topic 4.7 Inflation - How firms' pricing decisions affect the general price level.

Something to think about

Economics is not simply about statistics, diagrams, and calculations. Instead, behind every economic statistic are real people making decisions - with direct consequences and opportunity costs.

Sometimes, what people expect to happen can be just as important as what is actually happening right now. That is what makes the 2026 Nobel Prize in Economics so interesting.

Discussion question

Suppose that the central bank in your country announces that interest rates will fall next month.

1. How might this announcement affect households and firms before interest rates actually change?
2. Consider the possible economic effects on consumption, saving, borrowing, investment, and total demand.