Putting people into economic models
American economist Edmund S. Phelps has won this year’s Nobel Prize in Economics for his work on the trade-offs between unemployment and inflation. The prize represents a return to a more traditional economic approach, after last year's award to game theorists Thomas Schelling and Robert Aumann.
The Royal Swedish Academy of Sciences said his work had "deepened our understanding of the relation between short-run and long-run effects of economic policy." 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. "He has emphasized that not only the issue of savings and capital formation but also the balance between inflation and unemployment are fundamentally issues about the distribution of welfare over time," the academy said. "Phelps' analyses have had a profound impact on economic theory as well as on macroeconomic policy."
In his research, Phelps showed how low inflation today leads to expectations of low inflation in the future, thereby influencing future policy decisions by corporate and government leaders. His research suggested that inflation was not a cause of unemployment but there was a base level of unemployment in the economy that helped keep prices steady. Phelps' framework helped central banks shift their focus towards using inflation expectations to set monetary policy rather than concentrating on money supply and demand.
Professor Phelps said of his work: "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."
American economist Edmund S. Phelps has won this year’s Nobel Prize in Economics for his work on the trade-offs between unemployment and inflation. The prize represents a return to a more traditional economic approach, after last year's award to game theorists Thomas Schelling and Robert Aumann.
The Royal Swedish Academy of Sciences said his work had "deepened our understanding of the relation between short-run and long-run effects of economic policy." 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. "He has emphasized that not only the issue of savings and capital formation but also the balance between inflation and unemployment are fundamentally issues about the distribution of welfare over time," the academy said. "Phelps' analyses have had a profound impact on economic theory as well as on macroeconomic policy."
In his research, Phelps showed how low inflation today leads to expectations of low inflation in the future, thereby influencing future policy decisions by corporate and government leaders. His research suggested that inflation was not a cause of unemployment but there was a base level of unemployment in the economy that helped keep prices steady. Phelps' framework helped central banks shift their focus towards using inflation expectations to set monetary policy rather than concentrating on money supply and demand.
Professor Phelps said of his work: "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."
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