Daniel Stelter: Stagnation and inflation – the Nobel Prize exposes the failure of politics

On closer inspection, economics turns out to be more relevant to practice than is generally thought. This also applies – or especially – to the research that is honored with an Alfred Nobel Memorial Prize.

Last week, the Americans Robert Hall and Michael Woodford were honored as this year's winners. At first glance, their research has little to do with each other. Hall received the prize for his research on consumerism and Woodford for his work on monetary policy.

What their works have in common, however, is the importance of expectations. For example, if people expect permanently higher incomes, they increase their consumption at an early stage. If, on the other hand, they perceive today's additional income as unsustainable or if they even fear a lower income in the future as a result of today's payments, they save more instead of consuming.

Expectations also play a significant role in monetary policy. For example, if companies and households expect higher inflation in the future, they will promptly increase prices, consume more and demand higher wages. The result: the expectation comes true. The central banks must therefore pay close attention to creating enough credibility with their monetary policy so that inflation expectations are low and stable.