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Inflation Model Earns Economics Nobel for American Edmund Phelps


American Edmund Phelps has won the 2006 Nobel Prize in Economics for his research in analyzing the relationship between inflation and unemployment.

Columbia University professor, Edmund Phelps, has become the sixth American to win a Nobel prize this year. The Royal Swedish Academy of Sciences this week awarded the prize to Phelps for his work in economics nearly four decades ago.

Phelps research challenged the view that you needed a one-time increase of the inflation rate in order to decrease unemployment. Prize Committee Chairman Jorgen Weibull says time has helped prove Phelps' hypothesis.

"During the oil crisis and so on prices went up, inflation went up and unemployment went up," said Jorgen Weibull. "So that was something you could say that he already anticipated the possibility of this."

Phelps says his theory shows how future economic policy depends on individuals' actions today and what they think may happen tomorrow.

"I have tried to put the people back into our economic model," explained Edmund Phelps. "And in particular, to take into account their expectations about what other economic actors are doing at the same moment and also about the future. Decisions by the government and individuals have to be made without complete information about the state of the world and very important, without complete knowledge of how the economy works."

Weibull says Phelps' work can help answer questions from countries like China and India which form economic policy in the face of rising populations.

"But in particular for those emerging and developing countries, these are really important questions, and Phelps, he has provided kind of a framework, basic principles from which you can start when you do these analyses," he said.

The Bank of Sweden established the economics prize in 1968 in memory of the Nobel Prizes founder, Swedish philanthropist Alfred Nobel. Phelps, along with the other Nobel recipients, will receive his award in December in Stockholm.