Nobel Economics Prize 2026: New Keynesian Macroeconomics

NOBEL ECONOMICS PRIZE 2026: NEW KEYNESIAN MACROECONOMICS

When growth is low, the government can boost it by increasing its spending. But how much must the government exactly spend? When inflation is high, the central bank can reduce it by increasing the interest rate. But how much must the interest rate actually be? This year's Nobel Economics Prize goes to two economists who answered these very important questions.

The traditional Keynesian macroeconomic models were based on the *historical relationships* among the macroeconomic variables. They worked well till the 1970s, when two oil shocks (1973 and 1979) caused a breakdown in these historical relationships - and led to stagflation (low growth and high inflation - ie, the worst of both worlds) in that decade.

In 1978, Robert Hall wrote a paper titled 'Stochastic Implications of the Life Cycle - Permanent Income Hypothesis: Theory and Evidence' in Journal of Political Economy (6k citations). In it, he proved that households' consumption depends on their expectations of their future income.

In 2003, Michael Woodford wrote a book titled 'Interest and Prices: Foundations of a Theory of Monetary Policy' (14k citations). He used Robert Hall's finding and built a New Keynesian macroeconomic model on a solid foundation of *microeconomic theory*.

The model consists of 3 equations (see top pic):

1. New Keynesian IS curve

Output gap in period t = Expectation in period t of the output gap in period t+1 minus a constant multiplied by the expected real interest rate gap (ie, nominal interest rate in period t minus the expectation in period t of the inflation in period t+1 minus the natural real interest rate in period t)

2. New Keynesian Phillips curve

Inflation in period t = Discounted expectation in period t of the inflation in period t+1 plus a constant (Phillips curve slope) multiplied by the output gap in period t

3. Taylor's monetary policy rule

Nominal interest rate in period t = Steady-state real interest rate plus inflation coefficient multiplied by inflation in period t plus output coefficient multiplied by output gap in period t plus a shock

Using this model, governments decide how much to spend and central banks decide the interest rate - in order to boost growth when it is low and reduce inflation when it is high.

This decade has seen a series of global economic crises: Covid pandemic, Ukraine War and Iran War. Yet the world economy is much better today than it was in the 1970s. The credit for this goes to the New Keynesian Model - which has become the most fundamental macroeconomic policy-making model in the world today. And the architects of this model are Robert Hall and Michael Woodford. So this is a very richly deserved Nobel Prize . . . !

Info-source: Nobel Prize Org

Bottom pic: Robert Hall and Michael Woodford

Christopher Nolan's 'Odyssey': Movie Review

CHRISTOPHER NOLAN'S 'ODYSSEY': MOVIE REVIEW

Christopher Nolan brings Homer's timeless epic to life in the 21st century . . .

Is man the master of his fate? Or is fate more powerful than man? Homer's 'Odyssey' asked this question almost 3000 years ago. And today we are still asking this question. That is the thing about great epics like Iliad, Odyssey, Ramayana and Mahabharata - they are timeless. And a great storyteller like Christopher Nolan can bring them to life for his time . . .

State/Government Control Of Hindu Temples

STATE/GOVERNMENT CONTROL OF HINDU TEMPLES

How to protect our temples' money? How to ensure financial honesty in our temples? The whole debate is focusing on only one factor: who must control a temple - the government or an independent trust. Swarajya website has done an excellent analysis of this issue. It points out that the most important factor is not who controls a temple - but whether the temple's accounts are regularly audited by an independent auditor. Temples whose accounts are regularly audited by an independent auditor have *not* had any financial scandals - regardless of whether they are controlled by the government or by an independent trust. Whereas temples whose accounts are *not* regularly audited by an independent auditor have had financial scandals - again, regardless of whether they are controlled by the government or by an independent trust . . .

India's Economy Since The Covid Crisis: Rural Vs Urban

INDIA'S ECONOMY SINCE THE COVID CRISIS: RURAL VS URBAN

How has the Indian economy fared since the Covid crisis? The below graphs show two indicators of the health of the economy:

1. % of workers who are in industry + services

2. % of workers who have regular wage/salary jobs

from 2018-19 (the last normal/pre-Covid year) to 2025 - for rural areas and urban areas separately.

1. % of workers who are in industry + services

a) Rural

This decreased from 42.2% in 2018-19 to 38.5% in 2019-20 due to the Covid crisis. Then it increased to 42.8% in 2025 - which is slightly above the pre-Covid level. This is good news.

b) Urban

This decreased from 94.5% in 2018-19 to 93.5% in 2020-21 due to the Covid crisis. Then it *further decreased* to 92.5% in 2025. This is very bad news.

2. % of workers who have regular wage/salary jobs

a) Rural

This decreased from 13.4% in 2018-19 to 12.1% in 2020-21 due to the Covid crisis. Then it increased to 14.1% in 2025 - which is slightly above the pre-Covid level. This is good news.

b) Urban

This decreased from 48.8% in 2019-20 to 46.4% in 2020-21 due to the Covid crisis. Then it increased to 47.6% in 2025 - which is still below the pre-Covid level. This is not good news.

Thus the Indian economy has become a two-track economy: rural and urban. And surprisingly, the rural economy is doing better than the urban economy . . .

Data-source: Periodic Labour Force Survey (PLFS)

Edmund Phelps: Inflation Vs Unemployment

EDMUND PHELPS: INFLATION VS UNEMPLOYMENT

Edmund Phelps, winner of the 2006 Nobel Economics Prize, has passed away. He won the Nobel Prize for "his analysis of the inter-temporal trade-offs in macroeconomic policy". 

Brief bio:

# BA @ Amherst College

# PhD @ Yale University

# Professor @ Columbia University

Some of the most fundamental models/concepts/principles in today's macroeconomics have come from him:

# Expectations-augmented Phillips curve.

# No long-run trade-off between inflation and unemployment.

# Unique equilibrium unemployment rate (where firms raise their wages at the same rate as wages are expected to rise).

# Golden rule of capital formation (to maximise long-run consumption): Optimal savings rate = Capital income / National income.

# Optimal R&D investment rate = The investment rate that yields a return equal to the economy's growth rate (similar to the above principle).

# Time-inconsistent preferences: "I want to save X amount for my children - but my parents want me to save Y amount for my children." Policy implication: Public measures that increase the savings of all generations (like a public pension system) can increase the welfare of all generations.

Major papers:

# The golden rule of accumulation: A fable for growthmen (American Economic Review, 1961)

# Investment in humans, technological diffusion and economic growth (American Economic Review, 1966)

# Phillips curves, expectations of inflation and optimal unemployment over time (Economica, 1967)

# Money-wage dynamics and labor-market equilibrium (Journal of Political Economy, 1968)

# The statistical theory of racism and sexism (American Economic Review, 1972)

Info-source: Nobel Prize Org

West Bengal Election 2026: Analysis

WEST BENGAL ELECTION 2026: ANALYSIS

In the last election (2021) Trinamool Congress won a whopping 216/294 seats (73%) and BJP won only 77 seats (26%). Trinamool with almost a 75% majority looked invincible. But there were two important things:

1. Votes: Trinamool got 48.5% of the votes and BJP got 38.1% - a difference of 10.4% points. A big gap - but not as big as the seats gap.

2. Trend: The bottom graph tells the real story. In 2021, BJP had massively improved its position/performance: from just 10.6% votes in 2016 to 38.1% in 2021 - an increase of 27% points. BJP clearly had the momentum - the only question was: could it sustain its momentum to overtake Trinamool?

The question was answered on Monday: BJP got 45.9% votes (+8% points) and 207 seats (70%). Trinamool got 41.1% votes (-7% points) and only 80 seats (27%). BJP converted its vote gap of -10% in the last election to +5% this time.

In a first-past-the-pole system, a small vote gap can translate into a big seats gap. Trinamool did it in 2021 - and BJP has done it this time . . .

Dhurandhar: The Revenge - Review

REVIEW

Dhurandhar: The Revenge does not have part one's perfection. But what it lacks in perfection, it makes up in fun. So with all its imperfections, it is still one hell of a ride.

If Aditya Dhar had given as much as care to part two's script as he had given to part one's script, then part two would have been an all-time great movie (like part one) and the duology would have been an all-time great cinematic work (like Dark Knight Trilogy). As such, both part two and the duology fall short of all-time greatness. But still, Aditya Dhar and his team have given lovers of India and Indian cinema something to cherish for a very long time . . .