2006 Nobel to Edmund Phelps

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2006 Nobel to Edmund Phelps

Press Release
9 October 2006

The Royal Swedish Academy of Sciences has decided to award The
Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred
Nobel 2006 to

Edmund S. Phelps Columbia University, NY, USA

"for his analysis of intertemporal tradeoffs in macroeconomic
policy".

Short run -- Long run The work of Edmund Phelps has deepened our
understanding of the relation between short-run and long-run
effects of economic policy. His contributions have had a decisive
impact on economic research as well as policy.

Low unemployment and low inflation are central goals of
stabilization policy. During the 1950s and 1960s the view of a
stable tradeoff between inflation and unemployment was
established, the so-called Phillips curve. According to this, the
price for reduced unemployment was a one-time increase of the
inflation rate. Phelps challenged this view through a more
fundamental analysis of the determination of wages and prices,
taking into account problems of information in the economy.
Individual agents have incomplete knowledge about the actions of
others and must base their decisions on expectations. Phelps
formulated the hypothesis of the expectations-augmented Phillips
curve, according to which inflation depends on both unemployment
and inflation expectations.

As a consequence, the long-run rate of unemployment is not
affected by inflation but only determined by the functioning of
the labor market. It follows that stabilization policy can only
dampen short-term fluctuations in unemployment. Phelps showed how
the possibilities of stabilization policy in the future depend on
today's policy decisions: low inflation today leads to
expectations of low inflation also in the future, thereby
facilitating future policy making.

Another issue where intertemporal tradeoffs are of central
importance concerns the desirable rate of capital formation. By
foregoing consumption for investment in physical as well as human
capital (education and research), today's generation can raise
the welfare of future generations. Phelps clarified possible
distributional conflicts among generations. He also showed that
all generations may, under certain conditions, gain from changes
in the savings rate. Phelps also pioneered the analysis of the
importance of human capital for the diffusion of new technology
and, hence, for growth.

Read more about this year's prize

Information for the Public Advanced Information (pdf) In order to
read the text you need Acrobat Reader. Links and Further Reading

Edmund S. Phelps, born 1933 (73) in Evanston, IL, USA (US
citizen). PhD in economics in 1959 from Yale University, CT, USA.
McVickar Professor of Political Economy at Columbia University,
NY, USA.

-- 
Robert MARKS, Australian Graduate School of Management,
              UNSW SYDNEY, NSW 2052, Australia
Home page:    <http://www.agsm.edu.au/~bobm>
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Received on 09-10-06