Inflation – Unemployment Dilemma. A Cross-Country Analysis

Abstract

According to Phillips’ study, there is an inverse link between inflation and unemployment. The major consequence of these imbalances lies in authorities’ ability to correct one of them, usually the unemployment, by influencing the components of the aggregate demand. Phillips' opinion is later countered by Friedman’s principle of currency neutrality. Together with Phelps, Friedman argues that, in the long run, the Phillips curve is vertical and any attempt to lower the unemployment below the natural rate leads to a simultaneous rise in unemployment and inflation. This paper aims to analyze the impact of the economic policy measures on the evolution of inflation and unemployment in the G7 countries, starting from the monetary criticism regarding the inefficiency of monetary impulses. In order to achieve this purpose, the developed econometric analysis tries to identify the existence and the direction of the nexus between variables, both in the short and long term, by using causality and cointegration methods, such as Granger, Granger-Wald and Johansen tests. Our findings support Phillips model on the short run, indicating that there is an inverse link between the inflation rate and the unemployment rate in the G7 states, during the analyzed period. However, on the long run, our results indicate that inflation and unemployment can coexist, fact that allows us to agree with the monetarist theories.

Testing the Validity of the Inflation-Unemployment Nexus within the West African Monetary Zone

“…It is clear from the short-run coefficient that a 1% change in unemployment will cause inflation to change in the opposite direction by 3.3975% on average. This validity of the Phillips Curve aligns with the findings of [38,22,14,48,36,23,37,30,15,6,20,18,42,7]. The error correction term indicates that 59.97% of the short-run errors in inflation are corrected yearly to attain long-run equilibrium.…”

“…The Model. Going by the Phillips Curve, our model is specified by [42] to capture the relationship between the inflation rate and unemployment rate within the WAMZ. The model is specified as follows:…”

Unleashing the power of economic forces: exploring the relationship between macroeconomic factors and unemployment in Norway and uk using ARDL approach

“…The variables of financial and trade globalization significantly contribute to increase in youth unemployment in the ASEAN region. Another research focused on investigating the impact of unemployment on Pakistan's growth rate from 1974 to 2020, as revealed by (Popescu & Diaconu, 2022). The empirical findings of the study demonstrate a negative and statistically significant relationship between unemployment and economic growth, as well as between inflation rates and economic growth.…”

The Exasperating Economic Misery in Nigeria: Can we Depend on Monetary Policy?

“…Time series must be stationary at first difference I(1) or above if the results of a particular test (Dickey-Fuller) for them demonstrate that they are non-stationary at level I(0). By including several lagged dependent variables, the Augmented Dickey-Fuller test may be utilized to eliminate the issue of autocorrelation between data (Popescu & Diaconu, 2022). The following equations can be used to represent the specific version of the regression function employed in the ADF test: Equation 4 through Equation 8 captures the unit root test model with a constant and trend assumption for misery index (MSI), monetary policy rate (MPR), import growth (IMP), economic growth (GRT), and foreign direct investment net inflow (FDI) respectively.…”