Nobel prize in economics awarded to Robert E. Hall and Michael Woodford

Robert E. Hall and Michael Woodford were on Monday awarded the Nobel memorial prize in economics for work that underpins the models used by central banks and governments to "smooth out" periods of boom and bust.

The U.S.-born pair were jointly awarded for their contribution to the "microeconomic foundations" that contribute to macroeconomic stability.

The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel was established by Sweden's central bank in 1968. The winners will split a 12 million Swedish kronor ($1.2 million) prize.

Hall, born in California, is a professor at Stanford University, while Massachusetts-born Woodford is a professor at Columbia University.

"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," John Hassler, chair of the Committee for the Prize in Economic Sciences, said in a statement.

During the stagflationary oil crises of the 1970s, widely accepted Keynesian models — which prescribed cutting interest rates and increasing government budget deficits to tackle recessions — seemed to "no longer work," the Royal Swedish Academy of Sciences said.

To revitalize these models, the economists' separate work has looked beyond macroeconomic variables such as inflation, production and consumption and showed how individual households and businesses collectively shape the economy through decision-making based on their expectations for the future, the academy said.

Their work has shown the importance of central banks and governments communicating their policy plans, which can "influence this view of the future and move the economy in the right direction," it said.