Edmund Phelps: Inflation Vs Unemployment

EDMUND PHELPS: INFLATION VS UNEMPLOYMENT

Edmund Phelps, winner of the 2006 Nobel Economics Prize, has passed away. He won the Nobel Prize for "his analysis of the inter-temporal trade-offs in macroeconomic policy". 

Brief bio:

# BA @ Amherst College

# PhD @ Yale University

# Professor @ Columbia University

Some of the most fundamental models/concepts/principles in today's macroeconomics have come from him:

# Expectations-augmented Phillips curve.

# No long-run trade-off between inflation and unemployment.

# Unique equilibrium unemployment rate (where firms raise their wages at the same rate as wages are expected to rise).

# Golden rule of capital formation (to maximise long-run consumption): Optimal savings rate = Capital income / National income.

# Optimal R&D investment rate = The investment rate that yields a return equal to the economy's growth rate (similar to the above principle).

# Time-inconsistent preferences: "I want to save X amount for my children - but my parents want me to save Y amount for my children." Policy implication: Public measures that increase the savings of all generations (like a public pension system) can increase the welfare of all generations.

Major papers:

# The golden rule of accumulation: A fable for growthmen (American Economic Review, 1961)

# Investment in humans, technological diffusion and economic growth (American Economic Review, 1966)

# Phillips curves, expectations of inflation and optimal unemployment over time (Economica, 1967)

# Money-wage dynamics and labor-market equilibrium (Journal of Political Economy, 1968)

# The statistical theory of racism and sexism (American Economic Review, 1972)

Info-source: Nobel Prize Org

West Bengal Election 2026: Analysis

WEST BENGAL ELECTION 2026: ANALYSIS

In the last election (2021) Trinamool Congress won a whopping 216/294 seats (73%) and BJP won only 77 seats (26%). Trinamool with almost a 75% majority looked invincible. But there were two important things:

1. Votes: Trinamool got 48.5% of the votes and BJP got 38.1% - a difference of 10.4% points. A big gap - but not as big as the seats gap.

2. Trend: The bottom graph tells the real story. In 2021, BJP had massively improved its position/performance: from just 10.6% votes in 2016 to 38.1% in 2021 - an increase of 27% points. BJP clearly had the momentum - the only question was: could it sustain its momentum to overtake Trinamool?

The question was answered on Monday: BJP got 45.9% votes (+8% points) and 207 seats (70%). Trinamool got 41.1% votes (-7% points) and only 80 seats (27%). BJP converted its vote gap of -10% in the last election to +5% this time.

In a first-past-the-pole system, a small vote gap can translate into a big seats gap. Trinamool did it in 2021 - and BJP has done it this time . . .

Dhurandhar: The Revenge - Review

REVIEW

Dhurandhar: The Revenge does not have part one's perfection. But what it lacks in perfection, it makes up in fun. So with all its imperfections, it is still one hell of a ride.

If Aditya Dhar had given as much as care to part two's script as he had given to part one's script, then part two would have been an all-time great movie (like part one) and the duology would have been an all-time great cinematic work (like Dark Knight Trilogy). As such, both part two and the duology fall short of all-time greatness. But still, Aditya Dhar and his team have given lovers of India and Indian cinema something to cherish for a very long time . . .

Christopher Sims: VAR Model And Impulse-Response Analysis

2011 Nobel Economics Prize winner Christopher Sims (who passed away yesterday) revolutionised macroeconomics by developing the Vector Auto Regression (VAR) model and impulse-response analysis.

Till the 1970s, macroeconomic analysis involved taking a large system of equations built around a Keynesian macroeconomic model and statistically estimating them. The estimated system was then used to:

1. Interpret time series

2. Make economic forecasts

3. Conduct policy experiments

These large models were successful in explaining the historical data. But in the 1970s, Western countries had high inflation along with low growth and high unemployment. During this period of 'stagflation', the large models started showing instabilities - which created problems.

In 1980, Christopher Sims wrote a paper titled "Macroeconomics And Reality" (Econometrica, 22k+ citations) to solve this problem. He developed a new methodology using a new model called Vector Auto Regression (VAR). VAR is basically a system of N equations of N variables in which each variable is a function of:

1. Its own past values

2. Past values of the other variables

3. Some exogenous shocks.

His methodology has 3 steps:

1. Estimate the VAR model and forecast the macroeconomic variables - by separating unexpected movements in the variables from expected movements.

2. Identification - ie, break down these unexpected movements into structural shocks (ie, shocks that are the fundamental causes of macroeconomic fluctuations).

3. Impulse-response analysis - ie, trace out the dynamic impact of these shocks on subsequent movements in all the variables.

Sims' new methodology revolutionised macroeconomics. Today, VAR model and impulse-response analysis have become the basic tools of macroeconomic analysis. They are used to answer questions like:

1. What causes economic cycles?

2. What are the effects of fiscal policy?

3. What are the effects of monetary policy?

The pic is from Sims' paper. It shows the impulse-response analysis of America's GDP - ie, it shows how GDP is affected by 6 variables: money supply, GDP itself, unemployment, wages, prices and import prices (top to bottom). As you can see, the graphs do not show the confidence intervals. In the 1970s/80s, computers were not very powerful - so it was difficult to calculate the confidence intervals. In recent times, of course, every impulse-response graph shows the confidence intervals . . .

Info-source: Nobel Prize Org

Budget 2026-27 Analysis

BUDGET 2026-27 ANALYSIS

# Fiscal deficit is decreasing from 4.4% of GDP (2025-26) to 4.3% (2026-27) - a decrease of 0.1% points. This is good.

# Nominal GDP is estimated to grow/increase in 2026-27 by 10%.

The 4 Budget components are changing from 2025-26 to 2026-27 like this:

1. Revenue Receipts (good income - ie, taxes)

This is increasing by 7.2% - which is less than the GDP growth rate (10%). This is bad.

2. Capital Receipts (bad income - ie, loans)

This is increasing by 8.8% - which is less than the GDP growth rate. This is good.

3. Revenue Expenditure (bad spending - salaries, schemes, subsidies)

This is increasing by 2% - which is less than the GDP growth rate. This is good.

4. Capital Expenditure (good spending - ie, infrastructure)

This is increasing by 22.1% - which is more than the GDP growth rate. This is good.

The low increase in Revenue Receipts is due to the recent GST tax cuts. But overall this is both a pro-growth and fiscally disciplined Budget . . .

Best Movies Of 2025

Best Movies Of 2025

1. Kantara: Chapter 1

2. Dhurandhar

3. Phule

4. 120 Bahadur

5. Haq

6. Tanvi The Great

7. F1

8. Complete Unknown

9. Avatar: Fire And Ash

10. Mission Impossible: Final Reckoning

'Dhurandhar' Movie Review

MOVIE REVIEW

How do you kill a pack of wolves? You send a tiger disguised as a wolf into the wolves' den - and kill them one by one. 'Dhurandhar' is the story of an Indian spy who infiltrates Pakistan's network of mafia gangs, intelligence agencies and terrorist groups - and gives them a dose of their own medicine.

An excellent action-thriller. A grand epic that must be seen on the big screen. A must-watch for every Indian.

Written and directed by Aditya Dhar. Starring Ranveer Singh, Sanjay Dutt, Akshaye Khanna, Arjun Rampal and R Madhavan . . .