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.

Instead of just looking at macroeconomic variables such as inflation, production and consumption, Hall and Woodford showed how the combined effect of individual households and businesses affects the economy through their forward-looking decision-making, the Royal Swedish Academy of Sciences said in a statement. They also demonstrated how central bank and government communications "influence this view of the future and move the economy in the right direction," the academy said.

"On the basis of these models, well-timed fiscal and monetary policy measures can reduce the economy's peaks and troughs," the academy added.

"Since the new models' introduction, they have been extremely helpful in dealing with the economic downturns that have affected us."

The economics memorial prize is the last to be announced, following the original Nobel Prizes in physiology or medicine, physics, chemistry, literature and peace.