Edmund S. Phelps won the 2006 Nobel Prize in Economics for analyzing trade-offs between inflation and unemployment.
Phelps showed that the relationship between inflation and unemployment depends on expectations. In the short run, unexpected inflation may affect employment, but workers and firms eventually adjust their expectations. As expectations change, the economy tends to return toward a natural rate of unemployment.
This work challenged the idea that policymakers could permanently reduce unemployment simply by accepting higher inflation. Phelps also studied capital accumulation, wage formation, and the role of expectations in macroeconomic policy.
His conclusions are related to, but distinct from, Milton Friedman’s work on expectations and the natural rate of unemployment. Phelps received the economics prize alone in 2006.