Theories that shook the Fed win Edmund Phelps the Nobel
October 10, 2006
By Rich Miller and Jonas Bergman
Washington - Edmund Phelps, a professor at Columbia University in New York, yesterday won the Nobel prize in economic sciences for his theories on the interplay between inflation expectations and unemployment.
Phelps (73), the first solo winner of the economics prize since 1999, would get $1.37 million (R10.7 million), said the Royal Swedish Academy of Sciences, which selected the winner.
The academy said Phelps "challenged the earlier view on the relationship between inflation and unemployment.
"He recognised that inflation does not only depend on unemployment but also on the expectations of firms and employees about price and wage increases."
Phelps's work in the 1960s built on earlier theories, known as the Phillips curve, showing that wage growth accelerated as the unemployment rate dropped.
Phelps showed that there was a "natural" rate of unemployment, below which inflation pressures were likely to intensify. His theories led to increased vigilance against inflation at the US Federal Reserve and other major central banks.
"It certainly changed thinking about inflation and unemployment," Phelps said yesterday. "It must have had a significant effect on thinking about the benefits and costs of various government policies. Easy money policies are a no-no. In the mid-1960s, when I was beginning to write about this, easy money was fine."
Paul Samuelson, a professor at the Massachusetts Institute of Technology who became the second recipient of the Nobel economics prize in 1970, said Phelps's work helped shape the thinking of the current generation of central bankers.
"He revolutionised the Phillips curve. When the Fed today tries to arrive at a naturally occurring rate of unemployment that can be reached, it's largely by the twist that Ed Phelps gave to the previous Solow-Samuelson version of the Phillips curve," Samuelson said.
More recently, Phelps has been looking into whether policy makers at the Fed can set a specific target level of inflation and work to achieve it.
"I'm a little bit friendly toward inflation targeting," Phelps said. But he was "a little bit bothered by the fact that the usual formulations of inflation targeting are kind of unrealistic".
Joseph Stiglitz, a professor at Columbia who won the prize in 2001, called Phelps's theories "the most important work of macroeconomics of this generation".
Phelps has written frequently on the notion that "dynamism", the creation and development of new ideas, was the key to fostering growth over the long run. - Bloomberg
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