The Nobel committee says there is no alternative to the models inside every central bank. The economy has other ideas: the long cycle those models were built to control has given way to something faster.
On 12 October the Royal Swedish Academy of Sciences gave this year’s Nobel prize in economics to Robert Hall of Stanford and Michael Woodford of Columbia. Their work, the Academy explained, supplies the foundations of the models that central banks and finance ministries now use to steer economies.
The economics prize is not one of Alfred Nobel’s originals. It was endowed in 1968 by Sweden’s central bank. This year, fittingly, the central bank’s prize went to the central banks’ model.
Twenty-four days later a central bank replied. On 5 November the Bank of England raised interest rates to 4 per cent, less than eleven months after it last cut them, and warned that inflation, now 3.5 per cent, is heading for about 5 per cent by the middle of next year. The Federal Reserve performed the same about-turn in September, the European Central Bank in June.
So it is worth asking what, exactly, these models are steering.
The prize honours the theory of stabilisation, and stabilisation presumes a cycle: a long swell of expansion, a recession, a recovery, with the central bank leaning gently against each. For a generation that cycle was real. America’s three expansions before 2020 lasted ten years, six years and nearly eleven. Britain’s economy grew for sixty-three consecutive quarters, from 1992 to 2008 – long enough for a Chancellor to promise an end to boom and bust and be believed. After March 2009 the Bank of England did not touch Bank Rate for more than seven years.
That economy has gone.
In 2020 the United States had the shortest recession in records going back to 1854. It lasted two months. The committee that certified it was chaired, as it happens, by Robert Hall. British inflation went from under 1 per cent to 11.1 per cent and back to 2 per cent in little more than three years; it has since risen, fallen and risen again. Bank Rate, motionless for seven years, has moved twenty-one times in the past five: up fourteen times, down six, and now up once more.
When the Office for National Statistics announced in February 2024 that Britain was in recession, the recession it described had already ended. In March 2023 depositors pulled $42 billion out of Silicon Valley Bank in a day; the biggest American bank run of 2008 took ten days to remove $16.7 billion. In April 2025 Washington announced its highest tariffs in a century on a Wednesday and paused the centrepiece the following Wednesday, thirteen hours after it took effect.
The business cycle has not been tamed. It has been shortened until it is no longer a cycle at all. Thomas Barkin, president of the Federal Reserve Bank of Richmond, counted the blows in May: the pandemic, the invasion of Ukraine, the collapse of Silicon Valley Bank, the tariffs, the war in the Middle East. Five in six years, arriving on average eighteen months apart.
This is what defeats the prize-winning machinery. Its instrument is the interest rate, and by the Bank of England’s own long-standing reckoning a change in rates takes up to two years to have its full effect on inflation. So the Bank must forecast two to three years ahead. That was reasonable when the cycle took a decade to turn. It is close to hopeless when the shocks arrive eighteen months apart. The central bank is always treating the last one. Milton Friedman had a name for this: the fool in the shower, scalded and frozen by turns, forever adjusting the tap in answer to water that left the boiler some time ago.
The record bears him out. In August 2021 the Bank expected inflation to peak at 4 per cent. It peaked at 11.1. On 5 February this year it expected inflation to be back at about 2 per cent from April, and the Governor remarked that monetary policy was not, at present, being hit by big new shocks. The war with Iran began twenty-three days later. Neither forecast was foolish – no model predicts an invasion or a blockade. But a framework that is right only in the intervals between shocks is right less and less of the time.
The practitioners know it. In 2024 Ben Bernanke, himself a laureate, reviewed the Bank’s forecasting, found serious shortcomings in its central model – a model of precisely the family now being honoured – and told the Bank to replace or rebuild it. He added that the Bank’s errors had been no worse than its peers’. That is not a defence. It is the point. The Federal Reserve dropped the centrepiece of its 2020 strategy after only five years.
Andrew Bailey went further last month in Istanbul, in a speech entitled “Financial resilience in an age of repeated shocks”. The great shocks of recent years, he said, have come unusually fast, and large ones should no longer be thought exceptional. No interest rate can pump oil or gas. As for promises about the future path of rates, he is sceptical: too much is uncertain.
Nor is this an Anglo-American mood. Christine Lagarde told the European Parliament in June that supply shocks are becoming more frequent. In July Michele Bullock, governor of Australia’s Reserve Bank, gave a speech entitled “Monetary Policy in an Era of Shocks”.
It is a change of climate, not a run of bad weather. Tariffs, oil and rare minerals are now weapons of state rivalry. Supply chains tuned for cost have no slack. Money moves at the speed of a phone app. Growth leans ever more heavily on a single investment boom, in artificial intelligence. And governments that borrowed to shorten each downturn have less left for the next: the IMF called its October outlook “Resilience Under Strain, Urgent Choices”.
The Academy would reply that recessions and inflations are now briefer than they were, and that its models, still being refined, deserve the credit. It is half right. There has been no second 1930s. But brevity is not stability. A patient who is in and out of hospital every eighteen months is not well merely because each stay is short.
None of this diminishes the laureates. Hall and Woodford helped to rebuild macroeconomics after the oil shocks of the 1970s broke the models that came before. The Academy tells that story well: relationships that had held for decades stopped holding, stimulus arrived at the wrong moment, and a profession sure of its tools had to begin again. It does not seem to notice that it is describing the present. Woodford, to his credit, has not stood still. He has spent much of the past decade studying how real people, with limited foresight, fall short of the far-sighted calculators in his own model.
What follows is not despair but a humbler ambition: less fine-tuning, more resilience. Scenarios rather than point forecasts, which the Bank has begun to publish. Spare capacity – in energy, in supply chains, in the public finances – treated as insurance rather than waste. In December 1974, in the middle of the last great inflation, Friedrich Hayek collected the same prize and used his lecture, “The Pretence of Knowledge”, to warn his colleagues against claiming a precision their subject does not allow.
The Bank’s rate rise fell eighteen years to the day after Queen Elizabeth II, opening a building at the London School of Economics, asked why nobody had noticed the financial crisis coming. This time everybody has noticed: the Governor, the Fed, Frankfurt, the IMF. Only in Stockholm is there still no alternative.
