Nobel Prize in Economic Sciences 2022
- 11 Oct 2022
- 3 min read
For Prelims: Nobel Prize 2022, Banking System
For Mains: Nobel Prize 2022, Significance of Banking System in Economy
Why in News?
The Royal Swedish Academy of Sciences has decided to award the 2022 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel to Ben S. Bernanke, Douglas W. Diamond and Philip H. Dybvig “for research on banks and financial crises.”
- The 2021 Nobel Prize in Economic Sciences was awarded in one half to Canadian-born David Card (labor economics) and the other half jointly to Israeli-American Joshua D Angrist and Dutch-American Guido W Imbens (analysis of causal relationships).
- Other 2022 Nobel Prizes for Literature, Chemistry, Physics, Medicine and Peace have already been announced.
Unlike the other prizes, the economics award wasn't established in Alfred Nobel's will of 1895 but by the Swedish central bank in his memory. The first winner was selected in 1969.
What Contribution have these Laureates made in the Banking System?
- Ben S. Bernanke:
- Ben Bernanke analysed the Great Depression of the 1930s, the worst economic crisis in modern history.
- Through statistical analysis, Bernanke demonstrated how failing banks played a decisive role in the global depression of the 1930s.
- He showed how bank runs were a decisive factor in the crisis becoming so deep and prolonged.
- It also helped in understanding the importance of well-functioning bank regulation.
- Bernanke was the head of the US central bank, the Federal Reserve, when the 2008 crisis hit, and was able to “put knowledge from research into policy”.
- Douglas W. Diamond and Philip H. Dybvig:
- Both Diamond and Dybvig worked together to develop theoretical models explaining why banks exist, how their role in society makes them vulnerable to rumors about their impending collapse, and how society can lessen this vulnerability. These insights form the foundation of modern bank regulation.
- They presented a solution to bank vulnerability, in the form of deposit insurance from the government. When depositors know that the state has guaranteed their money, they no longer need to rush to the bank as soon as rumors start about a bank run.
- Diamond also showed how banks perform a societally important function. As intermediaries between savers and borrowers, banks are better suited to assessing borrowers’ creditworthiness and ensuring that loans are used for good investments.
UPSC Civil Services Examination Previous Year Question (PYQ)
Q. What policy instruments were deployed to contain the Great Economic Depression? (2013).