Edmund S. Phelps and Modern Macroeconomics Philippe Aghion, Roman Frydman, Joseph Stiglitz, and Michael Woodford November 2001 It is not easy to summarize Ned Phelps’s monumental contribution to economics. A first impression is likely to be of a vast array of original concepts and models: the “natural rate of unemployment” and the expectations-augmented Phillips curve (1967, 1968, 1971), the “island” parable of search unemployment (1968, 1969, 1970), “incentive/efficiency wages” (1968), optimal inflation targeting over time (1967, 1972, 1978), the consequences of staggered wage-setting for unemployment dynamics (1977, 1979) and for disinflation (1978), the “customer market” model of pricing (1970, 1994), the roles of education and technological diffusion in long-run growth (1966), “golden rules” for investment in physical capital (1961) and in research (1966), dynamic inconsistency in savings behavior (1968), statistical discrimination (1972), and “structuralist” models of endogenous variation in the natural rate of unemployment (1994). Nearly all of these innovations have had a substantial impact, and some have been developed further by others in ways that have won considerable recognition. Thus the golden rule was further developed in the “overtaking principle” of Weizsäcker; the Phelps-Koopmans dynamic inefficiency theorem led to results by Cass (1972); the “island” parable was used in the celebrated rational-expectations business-cycle model of Lucas (1972) and in the analysis of equilibrium unemployment by Lucas and Prescott (1974); Phelps’s conception of equilibrium unemployment was further developed by Stiglitz (1973); the model of staggered wage-setting was developed econometrically by Taylor (1979, 1980, 1993); the efficiency wage model was later extended to shirking by Calvo (1979) and Shapiro and Stiglitz (1984); the “customer market” model played a central role in the analysis of Okun (1981); the labor-market hysteresis hypothesis was tested by Blanchard and Summers (1985); the Nelson-Phelps view of role of education in technical progress has been an important theme of the recent Schumpeterian growth literature; the Phelps-Pollak time-inconsistent preferences have been built on by Laibson (1997) and others; the “Phelps problem” of optimal inflation planning has been extensively analyzed by authors including Taylor (1979) and Sargent (1999); the relation between population and technical progress relation is stressed in the recent work of Jones (1995) and others; the “structuralist” theory of an endogenous natural rate has been tested in econometric work by Blanchard, Bean, and others; and so on and on. Yet we believe it is also possible to see Phelps’s primary contribution as the unfolding of a single central project: introducing imperfect information, with its associated market frictions, and imperfect knowledge, with its consequent complications, into macroeconomics. This contribution has been of fundamental importance, not only to the development of macroeconomics over the past thirty-five