Edmund “Ned” Phelps, the man who helped explain why inflation expectations are crucial to macroeconomic stability, died last week at the age of 92.
In the late 1960s, Phelps wrote two groundbreaking articles which contained the work for which he would later be awarded the 2006 Nobel Prize for Economics.
The breakthrough in the first, published in the journal Economica in 1967, highlighted the role of people’s expectations in setting wages and prices. Phelps argued that if people expected higher inflation, workers would ask for higher wages and managers would raise their prices. The result would be a wage-price spiral.
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