When our changing ‘expectations’ are vital...

On December 10, Edmund Phelps, my colleague at Columbia University, would have received the Nobel Prize in economics for 2006. The award was long overdue. While the Nobel Prize committee cited his contributions to macroeconomics, Phelps had made contributions in many more areas, including the theory of growth and technological change, optimal taxation, and social justice. Phelps’ key observation in macroeconomics was that the relationship between inflation and unemployment is affected by expectations, and since expectations change over time – so too, will the relationship between unemployment and inflation change. If a government attempts to push the unemployment rate too low, inflation will increase, and so, too, will inflationary expectations. This insight holds two possible policy implications. Some policy-makers have concluded from Phelps’ analysis that unemployment rate cannot be lowered permanently without ever-increasing levels of inflation.

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Source : IIPM Editorial, 2006

An IIPM and Management Guru Professor Arindam Chaudhuri's Initiative