What an economics Nobel Prize winner knows about pricing NPR's Ailsa Chang chats with Michael Woodford of Columbia University, who was one of two Americans awarded the Nobel Prize in Economics. Transcript AILSA CHANG, HOST: All right. Two Americans have just been awarded the Nobel Prize in economics. Robert Hall of Stanford University and Michael Woodford of Columbia University are being honored for their work on how to bring stability to cycles of economic boom and bust. But they base their macroeconomic models off of their microeconomic research into how people actually decide to buy stuff and how businesses actually decide to price that stuff. Economist Michael Woodford is with us now. Welcome, and congratulations on winning the Nobel Prize. I don't get to say that every day on the show (laughter) .

MICHAEL WOODFORD: (Laughter) I don't get to hear it every day, either. Thanks a lot.

CHANG: So what were your first thoughts when you found out you got the Nobel Prize?

WOODFORD: Well, I wasn't terribly awake, I'm afraid (laughter). I was trying to sleep when they called. CHANG: Of course.

WOODFORD: Yeah. Because it's six hours later in Stockholm. CHANG: Yeah. From the East Coast. Yeah.

WOODFORD: And my wife said I didn't sound very enthusiastic about it... CHANG: (Laughter). WOODFORD: ...But I mean, it was because I was... CHANG: Groggy. WOODFORD: ...At best, half awake.

CHANG: Well, I want to better understand your work, and I'm going to try to keep up as best I can, at least on the basic concepts. So part of your research was on how businesses set prices, right? And I want to use a very concrete example. Like, let's say you're a trucking company, and you're thinking about adjusting your rates because the cost of diesel fuel unexpectedly surges. How would your work apply to that example?

WOODFORD: Well, a thing that is particularly central to my work is stressing the extent to which decisions that people make often are forward-looking, are not just a response to immediate conditions... CHANG: Yeah.

WOODFORD: ...But have to also take into account where you think things are headed. In the case of changes in costs that people have some reason to think is probably very temporary, I think, often, prices don't respond, that something that you think is likely to be lasting is going to be more likely to encourage people, more quickly, to already price it into the prices they're charging. So this issue of the extent to which people are able to make good guesses about where things are headed is something that the work that I've done particularly stresses. CHANG: OK. Let me give you another concrete example. WOODFORD: Sure.

CHANG: So, like, yesterday, the president of the Cleveland Federal Reserve Bank said that she heard from a business owner who's planning to raise prices more than his costs have gone up because he just expects those costs to keep climbing. How concerning is that, when businesses start to anticipate higher costs and raise their own prices in response maybe disproportionately? WOODFORD: Well, I think that illustrates that it isn't just the current costs... WOODFORD: ...That are going to matter for that decision.

It matters a lot what people think about where they could be going, you know, their guesses, their fears. And that's one reason why my work has stressed the idea that policymakers should be concerned about trying to give people reassurances about, you know - not false reassurances - but if they themselves intend not to let certain things happen or to make them not very likely to happen, that being able to communicate that to the public so that their expectations about where things can go are, in fact, not significantly out of line with what really happened, that actually is important for the economy. CHANG: If I could just jump in 'cause you're talking... WOODFORD: Yeah.

CHANG: ...About something very important. You have stressed in your work that policymakers should make an effort to communicate clearly and accurately and in... WOODFORD: Right.

CHANG: ...Proportion so that families and businesses can plan accordingly. How do you think Congress or President Trump or the Federal Reserve are doing on that front, on their communication skills? What do you think?

WOODFORD: Well, of course, it's a challenging thing. You know, I don't... WOODFORD: ...Want to imply that I could just communicate much better than them. And, you know - but often policymakers don't think as much as they should about how important this is to their role. I think that, often, they take the view that it's enough to react to whatever is happening once it happens. You should think about the fact that your behavior being predictable actually has big benefits for the economy, and that people can see that this fits into a pattern of behavior that they can count on.

CHANG: So in this time where people are quite focused on affordability, what advice do you have for people out there feeling just unsettled and unsure about the state of the economy right now? Any words of assurance or warning (laughter)? WOODFORD: Well, I certainly understand why it's an issue. I mean, it's not that economists should tell people to calm down. I think that it's appropriate for the government to indicate that it's keeping its eye on this issue, and to use monetary policy - make it clear that there is a commitment to keeping an eye on prices. I think it is - to some extent, it's a failure of public policy to not have kept a better lid on things.

CHANG: Michael Woodford, cowinner of the Nobel Prize in economics. Thank you, and congratulations again, Professor Woodford. WOODFORD: Thanks. terms of use permissions pages at for further information.

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