Anatolii Artemchuk 122679

Nazar Zabolotskyi 130764

Mikita Ashykhmin 130473

‘Phillips curve – is there a relationship between inflation and unemployment?’

Ormerod, Rosewell & Pheleps (2013) identified three distinct regimes in the space of
inflation and unemployment. He explored the regimes in the US, UK, and Germany in the
time between 1871 and 2009 using the statistical technique of fuzzy clustering. The author
found out, that there exist similarities in both timings and regimes across all mentioned above
countries. Nevertheless, the average rates of unemployment and inflation discovered in the
regimes are significantly different. Moreover, the outcomes from the cluster analysis without
a defined regime also show us shifts in unemployment and inflation rates in the time
continuum. The economic consequence of this is that the inflation–unemployment parallel
occasionally meets significant shifts. Another consequence according to the authors is that the
factors ruling the inflation–unemployment relation are very complex, making it complicated
to define the short-term Phillips curves’ timelines connected to a certain historical period. All-
in-all, according to the analysis it is senseless to count on a deal between inflation and
unemployment for policy purposes even in short periods of time.

In their publication, Karanassou, Sala, and Snower (2010) mention the well-liked
sageness that inflation and unemployment are not connected in the long-time perspective. At
the same time, one field of the literature imitates the inflation dynamics and approximates the
unemployment rate compatible with inflation stability, and the other one defines the actual
economic aspects that lead to the natural rate of unemployment. According to the new Phillips
curve model, we observe that the interrelation between the linger and extension or so-called
frictional growth causes an inflation-unemployment deal in the long-term perspective. Thus
the authors state that a holistic framework like the chain reaction theory (CRT) should be used
in the explanation of the common development of inflation and unemployment. According to
the text, the CRT approach also gives us a combination of the traditional structural
macroeconometric models and vector autoregressions.
 In their work Melisa and Chaido Dritsaki (2013) explore the connection between
inflation and unemployment in Greece in the period from 1980 till 2010. The publishers were
using the Johansen’s cointegration test instead of the Granger’s causality test which was
obtained by the vector autoregression (VAR). According to the results, there is a long-term
connection between inflation and unemployment for the period mentioned above. The
publishers also mention that the shocks in inflation rate provoke a decrease in unemployment
index.

Friedman (1977) in his work states that in last decades the views on the connection
between inflation and unemployment passed two stages and now are beginning a third. The
opening stage was the acceptance of a stable Phillips curve. The next stage was the appear of
inflation expectations, short-term shifts of the Phillips curve and the natural rate of
unemployment, determining the vertical location of a long-term Phillips curve. The last stage
relates to the empirical phenomenon of a positive allocation between inflation and
unemployment.

According to Russel and Banerjee (2008), current examples of inflation typically use
estimation methods that ignore inflation and its non-stationary nature and involve a vertical
long-run Phillips curve. Thus, the estimates generated are flawed and cannot be used to
confirm the validity of the vertical long-run Phillips curve. We identify a weak but significant
positive correlation between unemployment and inflation using a Phillips curve model that
accounts for the non-stationary characteristics of inflation. The results also show that in the
short term the trade-off between inflation and the unemployment rate worsens as average
inflation increases.

In this paper, Ball and Mazumder (2018) examine the behavior of US core inflation
as measured by the weighted median of industrial price changes. They find that core inflation
since 1985 is well explained by an expectation-augmented Phillips curve, where expected
inflation is measured by professional forecasts and labor market slack is captured by the
short-run unemployment rate. The publishers also note that expected inflation was backward-
looking until the late 1990s, but then remained firmly within the Fed's target. This change in
expectations changed the relationship between inflation and unemployment from an
accelerating Phillips curve to a flat Phillips curve. The definition explains why high
unemployment during the Great Recession did not significantly reduce inflation: partly
because inflation expectations were anchored and partly because short-term unemployment
rose less sharply than total unemployment.

References:

Ormerod, P., Rosewell, B. & Pheleps, P. (2013). Inflation/unemployment regimes and the
instability of the Phillips curve. Applied Economics, 45:12, 1519-1531.
https://doi.org/10.1080/00036846.2011.628299

Karanassou, M., Sala, H., & Snower, D. J. (2010). Phillips curves and unemployment
dynamics: a critique and a holistic perspective. Journal of Economic Surveys, Volume 24,
Issue 1, 1-51. https://doi.org/10.1111/j.1467-6419.2009.00598.x

Dritsaki, M., Dritsaki, C. (2013). Phillips curve inflation and unemployment: an empirical
research for Greece. International Journal of Computational Economics and Econometrics,
Volume 3, No. 1-2, 27-42. https://doi.org/10.1504/IJCEE.2013.056265

Friedman, M. (1977). Nobel Lecture: Inflation and Unemployment. Journal of Political

Economy Volume 85, Number 3. https://doi.org/10.1086/260579

Russel, B., Banerjee, A. (2008). The long-run Phillips curve and non-stationary inflation.
Journal of Macroeconomics, Volume 30, Issue 4, 1792-1815.
https://doi.org/10.1016/j.jmacro.2007.11.001

Ball, L., Mazumder, S. (2018). A Phillips Curve with Anchored Expectations and Short-Term
Unemployment. Journal of Money, Credit and Banking, Volume 51, Issue 1, 111-137.
https://doi.org/10.1111/jmcb.12502