American has won the 2006 Nobel Prize in Economics for his analysis of the relationship between inflation and unemployment.
The Royal Swedish Academy of Sciences says Phelps challenged the traditional view. The Academy says 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 says the 73-year-old Columbia University professor's work has "deepened the understanding of the relation between short-run and long-run effects of economic policy."
The Bank of Sweden established the economics prize in 1968 in memory of the founder of the Nobel Prizes, Swedish philanthropist Alfred Nobel.
The winner of the Nobel Peace Prize will be announced Friday.
Phelps is the sixth American to win a Nobel prize this year.
American researchers Andrew Fire and Craig Mello won the prize for medicine for a far-reaching discovery about how genes are controlled within living cells.
The chemistry prize went to American Roger Kornberg for carrying on his father's studies of how cells copy genetic information to be used by the body.
John Mather and George Smoot of the United States won the physics prize for their work exploring the earliest days of the universe, and the origin of galaxies and stars.
The winners will receive their awards in December in Stockholm.
Some information for this report was provided by AP and Reuters.