|Edmund S. Phelps, Nobel Economics Prize winner,
answers questions during a press conference at Columbia University
in New York where he teaches and works on his research Monday, Oct.
9, 2006 (AP Photo/David Karp) ]|
American Edmund S. Phelps won the 2006 Nobel Memorial Prize in Economic
Sciences on Monday for furthering the understanding of the trade-offs between inflation and its effects
The 73-year-old Columbia University professor's work showed how low
inflation today leads to expectations of low inflation in the future,
thereby influencing future policy decision making by corporate and
Phelps is the sixth American to win a Nobel this year, meaning that
every prize except for the literature and peace awards, which are yet to
be announced, have gone to Americans.
"I tried to put the people back into our economic model and in
particular to take into account their expectations about what other
economic actors are doing at the same time and in the future," he said.
Phelps challenged the prevailing view in the 1960s that there was a
stable, negative relationship between inflation and unemployment,
illustrated by the so-called Phillips curve.
"He recognized that inflation does not only depend on unemployment, but
also on the expectations of firms and employees about price and wage
increases," the academy said.
Phelps put together a new model to describe the relationship between
inflation and unemployment, known as the
expectations-augmented Phillips curve.
He also showed that there is a precise "equilibrium unemployment rate"
at which firms raise workers' wages at the same rate as average wages are
expected to rise in the economy overall. Those findings have influenced
central banks in their interest-rate decisions, the academy said.
"Phelps' work has fundamentally altered our views on how the
macroeconomy operates," the citation said, adding his work proved fruitful
in understanding the causes of the increases in both inflation and
unemployment in the 1970s.
In its citation announcing the award, the academy said that Phelps had
advanced the understanding of the trade-offs between full employment,
stable pricing and rapid growth, all of which are the central goals of any
sound economic policy.