Columiba Prof wins Econ Nobel

Columbia University professor Edmund Phelps on Monday won the 2006 Nobel prize in economics for pioneering work on the relationship between employment and inflation, which has influenced central banks around the world. Phelps, 73, is the first solo winner of the $1.37 million prize since 1999.

During the 1960s, Phelps built on what is known as the Phillips Curve, which held that when unemployment fell, there was a one-time rise in the rate of inflation.

Phelps felt that view didn't take into account the fact that consumers and businesses operate with incomplete information. He theorized that inflation depends on unemployment and expectations for future inflation.

As a consequence, the long-run rate of unemployment is not affected by inflation but only by the functioning of the labor market. Cutting interest rates or taxes to stimulate employment works temporarily, but can lead to higher inflation.

Further, policies that promote low inflation today will produce lower inflation expectations, aiding policymaking in the future. Phelps also looked at economic trade-offs, showing that deferring consumption in the short run to fund research, education and other business investment can improve economic conditions in the longer run.