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How Can Governments Stabilise the Economy? October 13, 2026 · 10:03 · With Maya, Omar, and Alex
Slow English FM brings news and stories in clear, simple English to help us understand the world. I’m Maya, and with me are Omar, our columnist for the economy and work, and Alex, our station journalist.
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Maya Welcome to Slow English FM. This is our round table, where we take one subject and look at it from more than one side. Slow English FM brings news and stories in clear, simple English to help us understand the world. I’m Maya, and with me are Omar, our columnist for the economy and work, and Alex, our station journalist. Today’s question is: how can governments and central banks soften sharp economic swings, and what can economic models tell them? Omar, let’s start with the basic idea. Omar A downturn can mean falling activity and fewer opportunities to work. A boom can bring pressure from rising prices. Governments and central banks may try to smooth these ups and downs. The Royal Swedish Academy of Sciences says that, in a recession, policy can include lower interest rates and a larger budget deficit. A budget deficit means government spending is greater than its income. The Academy says the opposite approach can be used to slow a booming economy. The aim is not to stop every change. It is to reduce the sharp peaks and deep falls. Maya So this prize was not for one new policy, but for work that helps explain how policy might affect the whole economy? Omar That’s right. On 12 October 2026, the Royal Swedish Academy of Sciences awarded the economics prize to Robert E. Hall and Michael Woodford. It cited their work on what it called the “microeconomic foundations of macroeconomic stabilisation.” In simpler terms, they helped build models of the whole economy by looking at the choices of households and businesses. Those choices include how much households spend or save, and what prices businesses set. The Academy contrasts this approach with relying only on statistical links between big measures like inflation, production and consumption. Maya Alex, what does that change when policymakers are trying to understand a shock or a recession? Alex It makes the decisions underneath the totals part of the picture. A model that looks only at economy-wide figures may show that consumption and production move together. But a model built from households and businesses also asks why they make choices, and what they expect will happen. The Academy says those expectations matter. A household deciding whether to spend or save looks ahead. A business deciding what price to charge may also look ahead. That helps policymakers ask not only what is happening now, but how people may respond to a policy announcement. Maya Omar, can you make that link between expectations and a policy choice more concrete, without assuming the same response from everyone? Omar The Academy’s example is that households and businesses make forward-looking decisions. If a central bank communicates a plan for interest rates, households may consider what that means for saving now or spending now. Businesses may consider whether to change their prices. The important point is that policy does not work only through the action itself. What people expect can also shape their choices. That gives policymakers a reason to think carefully about how they explain a plan, as well as what they decide to do. Alex And that does not mean a clear announcement guarantees the result the government wants. The model can help policymakers think through likely responses, but households and businesses still make their own decisions. The Nobel Prize release says communication can influence views of the future; it does not say it controls them. Maya Alex, the models look at individual choices. But people do not all have the same options. What does the reporting say about that limit? Alex An Associated Press report published by ABC News describes an important difference between households. It says some people are so poor that they cannot borrow or use savings when economic conditions change. The report attributes to the Nobel committee an estimate from a 1982 paper by Hall and Fredric Mishkin: around 80 percent of households based spending decisions on expectations for the future, while the rest lived from one moment to the next. That is the committee’s account of the estimate, not a claim that every household has the same freedom to respond. Maya So if a household cannot borrow or draw on savings, it may not be able to adjust spending in the way a model expects? Alex Yes. That is why the distinction matters. A policy that changes interest rates or government spending may reach households through different routes. Some can change when they spend. Others may have little room to wait or shift their spending. The report does not tell us exactly how every policy affects each group. But it does show why a model needs to take real limits on household choices seriously. Omar That fits the larger point: a model is useful when it helps explain how a policy moves through the economy. But it is not a promise that every household will react in the same way. If people face different limits, the response can differ too. Policymakers need to keep that in view when they use a model to choose a broad response. Maya There is another limit: not every economic problem begins with spending. Alex, what can we say about supply disruptions? Alex The Nobel Prize material notes that models built mainly around changes in demand have limits when the disruption is on the supply side. A severe energy shortage or a blockage in international trade can reduce what businesses can produce or deliver. A policy designed to change spending may not directly remove that shortage. The same material points to the oil shocks of the 1970s, when early models that did not include these foundations struggled with high inflation and high unemployment at the same time. That history is a warning against treating one model as a full answer to every kind of crisis. Maya Omar, does that mean the models are still useful, but policymakers need to ask what kind of problem they are facing? Omar That is a fair way to put it. The models described by the Academy help policymakers think about the choices of households and businesses, and about how expectations may change those choices. They can help assess when fiscal policy, such as government spending, or monetary policy, such as interest-rate changes, may soften a downturn or cool a boom. But a supply shock raises a different problem from weak demand. And the household evidence reminds us that not everyone can respond in the same way. The model informs a decision; it does not make the decision for the policymaker. Maya Alex, we have heard about the limits. What is the main contribution of the work recognized by the prize? Alex MIT News says Hall’s research in the late 1970s brought new attention to household spending and expectations. It also says Woodford’s 2003 book presented a broad model built on these individual choices. The shared idea is to connect the decisions of households and businesses to movements in the whole economy. That gives policymakers a way to ask how a change in policy may affect people’s choices, rather than looking only at past links between large economic measures. Omar And the prize announcement puts that work in a practical setting: well-timed policies can reduce economic peaks and troughs. Timing matters because people and businesses are already making decisions based on what they expect. Still, the evidence we have discussed points to care, not certainty. Some people have little room to adjust, and a supply disruption may not respond to tools aimed at demand. Maya That is our answer to the question we began with. Omar has explained how interest rates and government budgets can be used to soften booms and downturns. Alex has shown why expectations matter, and why household limits and supply disruptions can make the response harder. Economic models can help policymakers think through choices and timing, but they are guides, not guarantees. Thanks for listening to Slow English FM.
