The Nobel Prize for Economics was awarded to Edmund S. Phelps of the United States for his contributions on analyzing the tradeoff between inflation and unemployment, the Royal Swedish Academy of Sciences announced Monday.
Phelps, 73, professor of political economy at Columbia University in New York, was cited "for his analysis of intertemporal tradeoffs in macroeconomic policy," the academy said.
During the 1960s the so-called Phillips curve was launched that indicated a link between inflation and unemployment, where policy makers had a choice between low inflation or low unemployment.
The academy said Phelps challenged that view by adding that information was a factor as well, noting that companies and employees have incomplete information and therefore "must base their decisions on expectations."
Long-term unemployment rates were therefore affected not only by inflation but also how the labour market market functioned.
Stabilization policies were able to dampen short-term fluctuations in unemployment, but Phelps indicated that low inflation today led to expectations of low inflation in the future, shoring up future policy making, and formulating the basis for the expectations-augmented Phillips curve.
In effect, it meant that a low inflation policy could be regarded as investing in low inflation expectations, the academy said.
His research into the relationship between short-term and long- term effects of economic policy helped explain increases in inflation and unemployment during the 1970s, the academy said, and it has also clarified the limits of macroeconomic policy, for instance on how central banks set interest rates.
Other areas where Phelps's research has had implications was the formation of capital and welfare increase, including how public pension systems can contribute to raising the welfare of current and future generations.
The prize - formally called The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel - last year had gone to Robert Aumann of Israel and Thomas Schelling of the United States.
The prize is worth 10 million kronor (1.37 million dollars), and the award ceremony is held in Stockholm on December 10, the anniversary of Swedish industrialist and dynamite inventor Alfred Nobel's death.
The economics prize was, however, not one of the original prizes named in Nobel's will.
Phelps was the sixth US national this year to win a Nobel prize. Last week, Americans Andrew Fire and Craig Mello were awarded the medicine prize, John Mather and George Smoot shared the physics prize and Roger Kornberg was awarded the chemistry prize.
The Nobel prize for literature is to be announced on Thursday, while the Peace Prize will be announced on Friday.