Edmund S. Phelps has won the Nobel Prize in Economic Sciences 2006

Edmund S. Phelps, Professor of Political Economy at Columbia University, USA has won the Nobel Prize or Swedish Riksbank Prize in Economic Sciences 2006 for his analysis of intertemporal tradeoffs in macroeconomic policy.

The Royal Swedish Academy of Sciences made the announcement Monday at the press conference in the Academy in Stockholm.

"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." says the Royal Swedish Academy of Sciences in its citation.

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: how 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 generation 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 for growth." Says the citation.

73 year old Edmund S. Phelps got his PhD in Economics in 1959 from Yale University and later became Professor of Political Economy at Columbia University in New York.

So far, all the Nobel Prizes have gone to American scientists. They are in physiology, physics, chemistry and economics. This can be seen as the long term result of American investment in scientific research.

Phelps will get 10 million Swedish Kronor or about 1.37 million US dollars. The prize winning ceremony will be held on December 10th.

The Nobel Prize in Literature will be announced on Thursday and the Nobel Peace Prize will be announced in Oslo Norway on Friday.

By Chen Xuefei, People's Daily Online correspondent in Stockholm