Edmund Phelps

Definition

Edmund Phelps is an American economist known for his work on the relationship between inflation and unemployment, particularly through the development of the concept of the 'natural rate of unemployment.' His contributions have significantly shaped the understanding of the tradeoff represented by the Phillips Curve, emphasizing that this tradeoff is not stable in the long run due to expectations adjustments.

5 Must Know Facts For Your Next Test

1. Phelps was awarded the Nobel Prize in Economic Sciences in 2006 for his analysis of intertemporal tradeoffs in macroeconomic policy.
2. He argued that attempts to reduce unemployment below its natural rate would lead to accelerating inflation in the long run, contradicting the original Phillips Curve interpretation.
3. Phelps introduced the concept of 'expectations-augmented Phillips Curve,' which incorporates the role of inflation expectations into the analysis of inflation and unemployment.
4. His work highlighted the importance of supply-side factors and how they can affect economic performance, challenging traditional Keynesian views that primarily focused on demand-side policies.
5. Phelps emphasized that policymakers should focus on maintaining a stable environment rather than attempting to exploit short-term tradeoffs between inflation and unemployment.

Review Questions

• How did Edmund Phelps' view on the Phillips Curve challenge existing economic theories regarding inflation and unemployment?
  • Edmund Phelps challenged the traditional view of the Phillips Curve by arguing that there is no stable tradeoff between inflation and unemployment in the long run. He introduced the concept of the natural rate of unemployment, suggesting that any attempt to maintain unemployment below this natural rate would lead to rising inflation due to adjustments in expectations. This fundamentally shifted how economists understood the dynamics between these two variables over time.
• Analyze how Phelps' notion of adaptive expectations impacts monetary policy decisions related to inflation control.
  • Phelps' idea of adaptive expectations implies that if policymakers try to reduce unemployment through expansionary monetary policies, individuals will adjust their inflation expectations upwards over time. As a result, wages and prices will increase, leading to higher inflation without achieving sustained reductions in unemployment. This understanding forces policymakers to consider long-term effects rather than relying solely on short-term gains from stimulating demand.
• Evaluate the implications of Phelps' theories on contemporary economic policy, especially regarding managing inflation and unemployment during economic crises.
  • The implications of Phelps' theories suggest that during economic crises, a focus solely on stimulating demand to lower unemployment can backfire if it leads to uncontrollable inflation. Policymakers are encouraged to adopt a more balanced approach that considers supply-side factors and long-term growth strategies. By acknowledging the importance of maintaining a stable economic environment and avoiding temporary fixes, contemporary economic policy can be better aligned with achieving sustainable outcomes for both inflation and employment.

Related terms

Natural Rate of Unemployment:

The level of unemployment that exists when the economy is at full employment, influenced by factors such as frictional and structural unemployment, but not cyclical unemployment.

Phillips Curve:

A concept in economics that illustrates an inverse relationship between the rate of inflation and the rate of unemployment within an economy.

Adaptive Expectations:

A theory suggesting that individuals form their expectations of future inflation based on past experiences, which can influence wage and price-setting behavior.