American Edmund Phelps won the 2006 Nobel Memorial Prize in Economic Sciences yesterday for furthering the understanding of the trade-offs between inflation and its effects on unemployment.
In doing so, the 73-year-old Columbia University professor showed how low inflation today leads to expectations of low inflation in the future, thereby influencing future policy decision- making by corporate and government leaders.
"It's beginning to sink in that I have won this wonderful award," Phelps said from New York in a live telephone conference with reporters in Stockholm. "I understood that it could happen, but I had no idea when it would happen or if it would happen.
"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," he said.
The last time the prize went to a single winner was in 1999 when Canadian Robert Mundell, also of Columbia, won the prize for his analysis of monetary and fiscal policy under different exchange rate regimes.
The Royal Swedish Academy of Sciences said Phelps' work, done in the late 1960s, had "deepened our understanding of the relation between short-run and long-run effects of economic policy."
"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 said.
He also showed that there is a precise "equilibrium unemployment rate" at which firms raise workers' wages at the same rate as average wages are expected to rise in the economy overall.
Those findings have influenced central banks in their interest rate decisions, the academy said.
Phelps is the sixth American to win a Nobel Prize this year, meaning that every prize, save for literature and peace, which have not yet been announced, have gone to Americans.
The economics prize, worth 10 million kronor (US$1.4 million), is the only one of the awards not established in the will left by industrialist Alfred Nobel; it was set up by the Swedish central bank in 1968.