Nobel Memorial Prize for Economics

Recently, Douglas W Diamond, Philip H Dybvig and Ben S Bernanke won the Nobel Prize in Economics for research into banking and financial crises.

About the Award

• The economics award, among the highest honours in the field, is not, technically, a Nobel Prize.
• It is called the ‘Sveriges Riksbank Prize’ in Economic Sciences in Memory of Alfred Nobel as it was not among the original categories that Alfred Nobel set out in his will in 1895.
• It is funded by Sweden’s central bank and has been given out only since 1969.
  
  

Contributions:

• Bernanke in 1983 wrote a paper that broke ground in explaining that bank failures can propagate a financial crisis rather than simply being a result of the crisis.
• Diamond and Dybvig wrote a paper on the risks inherent in maturity transformation, the process of turning short-term borrowing into long-term lending.
• Diamond also wrote about how banks monitor their borrowers, noting that knowledge about borrowers disappears upon bank failures, extending the consequences of the upheaval.

Significance of their research

• Used by policymakers to understand and manage the economy operating in the background to turn savings into investment.
• It helped the world to understand the 2008 financial crisis and how banks can be managed to overcome the situation.
• The laureates have provided a foundation for our modern understanding of why banks are needed, why they’re vulnerable, and what to do about it.