Monday, October 09, 2006

Sweet Nobel 

While I thought Dale Jorgenson was more deserving, I am quite pleased that Edmund Phelps has won the Nobel in economics this year. For those who have held that the Phillips Curve tradeoff between inflation and unemployment was a chimera, Milton Friedman and Phelps stand side-by-side as the first to point out the fallacy.

In his research, Phelps suggested that inflation was not a cause of unemployment but argued that there was a base level of unemployment which helped keep prices steady.

The academy said the theoretical framework Phelps developed in the late 1960s helped economists understand the root of soaring prices and unemployment in the 1970s and the limitations of policies to deal with these problems.

His framework helped central banks shift their focus toward using inflation expectations to set monetary policy rather than concentrating on money supply and demand.

As a monetary policy researcher, Phelps and Friedman's works laid the framework for much of the work on inflation targeting that now dominates central bank policy research. It's only one of his many accomplishments, but it's vitally linked to my own work, so in some ways I should have preferred Phelps to Jorgenson. But both are richly rewarding; let's hope Jorgenson gets his next year.

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