American-born Robert E. Hall of Stanford University and Michael Woodford of Columbia University received the Nobel memorial prize in economics on Monday.

The Royal Swedish Academy of Sciences announced the award in Stockholm, saying the prize recognises their work on models that help governments and central banks manage economic shocks.

John Hassler, chair of the Committee for the Prize in Economic Sciences, said, "The laureates' work has provided us with a stable theoretical foundation for the models that are now used by central banks and governments around the world." He added, "With them, we are better equipped to deal with shocks in the economy, such as energy crises or sudden changes in how much households consume."

Unlike traditional Keynesian recipes that mainly rely on tax cuts and higher spending, Hall and Woodford’s models incorporate how households and firms actually decide to spend or invest when a shock hits. This makes policy responses more precise and improves on earlier approaches.

The academy noted that the new models allow policymakers to smooth out the economy’s peaks and troughs, improving the ability to deal with crises such as energy shortages or sudden changes in consumer behaviour.