The Empirical Evidence of the Phillips Curve in Bangladesh during

1991-2022: An Econometric Approach

Abstract
The main purpose of this study is to investigate the existence of the Phillips Curve in Bangladesh,
which refers to a hypothesised trade-off relationship between the inflation rate and unemployment rate.
Accordingly, annual macroeconomic time series data spanning from 1991 to 2022 for approximately
32 years are collected from the World Bank database. The empirical data analysis is conducted using
the econometric software package STATA 14. After the Augmented Dickey-Fuller (ADF) and Phillips
Perron (PP) unit root tests, cointegration relationships are examined using the Autoregressive
Distributed Lag (ARDL) bound test, followed by the estimation of Ordinary Least Squares (OLS)
coefficients. According to the ARDL bound test and the OLS, there is an inverse link between
unemployment and inflation in Bangladesh, although it is not statistically significant. For Bangladesh,
the original Phillips curve hypothesis is invalidated in the short-run by the results of the ARDL bound
test. In addition, stagflation is readily apparent in Bangladesh, as seen by the rising trends in both the
unemployment rate and inflation during 1991–2022. The study therefore proposes that the economy
be diversified through strong institutional collaboration and that appropriate policies be implemented
by the government and monetary authorities to address the menace of inflation and unemployment in
Bangladesh.
Keywords: Phillips Curve, Inflation, Unemployment, ARDL Model, Bangladesh
JEL Classification: C13, C22, C51, E23, E31, E52, O11, O54

1. Introduction
In any economy, unemployment and inflation are still major problems (Orji et al., 2015). To a great
extent, all policymakers would want to see low unemployment and inflation rates. Furthermore, it is
frequently asserted that a single-digit inflation rate and an approximate 5% unemployment rate
guarantee macroeconomic stability in an equal-opportunity economy. However, to attain
macroeconomic stability, which is necessary for planning, development, and growth, it is important to
look at how other economic fundamentals are moving.
An average measure of price increases is inflation (Orji et al., 2015; Nwaobi, 2009). In fact, indefinite
price hikes are detrimental to the economy, especially for underprivileged people who have little
savings. For this reason, when real wages decline as a result of a price increase, especially when there
is uncertainty involved, consumers, businesses, and the government become concerned (Orji et al.,
2015; Nwaobi, 2009). Economic growth is hampered by unemployment because it wastes human
resources and lowers welfare (Orji et al., 2015; Odo et al., 2017). Correspondingly, it is an observable
fact that arises when a person actively looks for a job but is not able to find it. In practical terms, the
unemployment rate is a commonly used statistical measure of unemployment that is computed by
dividing the number of individuals without jobs by the number of people with jobs.

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The relationship between price fluctuations and production and unemployment has been in
disagreement for a long time (Alper, 2017). Accordingly, Irving Fisher examined the connection
between pricing and the statistical relationship between price fluctuations and unemployment in his
paper, "A Statistical Relationship between Unemployment and Price Changes." Later, Tinbergen
carried out the initial econometric study conducted in 1936 and discovered a causal link between wage
inflation and unemployment. Nonetheless, the connection between unemployment and inflation has
become associated with the well-publicised research of A.W. Phillips (1958). Since 1958, the Phillips
curve has undergone numerous modifications. Ultimately, the approach's outcomes were determined
to be significant and legitimate in the short-run.
Two objectives of policymakers, low unemployment and low inflation, often conflict with their desire
to utilise monetary or fiscal policy to increase aggregate demand (Rasna, 2010). For this reason, the
relationship between unemployment and inflation has drawn the attention of macroeconomists and
decision-makers. Therefore, the Phillips curve is more important for aiming for inflation and national
economic growth, and it is more helpful for explaining the factors that influence and forecast inflation.

1.1 Statement of the Problem

Over the past few decades, one of the most important concerns has been the steadily rising inflation
rate in Bangladesh (Rasna, 2010; Haider & Dutta, 2012). A closer examination of the variables
influencing the inflation trend reveals that supply-side phenomena such as fluctuations in the price of
oil globally, exchange rates, and natural disasters that lead to supply shortages, as well as demand
factors such as excess demand, a substantial rise in government borrowing, and the rapid increase in
the nominal money supply, are all contributing factors. Nevertheless, stagflation is readily apparent in
Bangladesh as a result of an increase in the price level and a decrease in real GDP (Rasna, 2010). To
gain insight into the nature of the trade-off between unemployment and inflation, the trends in
unemployment and inflation are outlined below.

Figure-1: The Trends of Inflation and Unemployment in Bangladesh (1991-2022).

Source: Author’s compilation using Microsoft Excel software.

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Figure-1 shows that the unemployment rate in the early 1990s was relatively constant, ranging from
2.2% to 2.5% from 1991 to 1996. Between 1997 and 1999, the unemployment rate increased gradually,
peaking at 3.06%. The unemployment rate then varied in the early 2000s, ranging from 3.27% to
3.93%, before the global crisis caused an abrupt rise to 5% in 2009. From 5% in 2009 to 3.59% in
2015, unemployment progressively declined throughout the sluggish recovery phase. Due to economic
disruptions and the COVID-19 pandemic, an increasing unemployment trend began in 2020, reaching
5.21%.
On the other hand, Figure-1 shows that the inflation rate began to reach a noticeably high level in 1991
at 6.36% and stayed quite high through 1995, peaking at 10.3%. This time frame exhibits a significant
period of inflationary pressure. From 1996 to 2000, there was a substantial decline in inflation,
dropping to approximately 2.2% by the year 2000. This time frame represents a period of declining
inflation and relatively stable consumer prices. Until 2009, the rate of inflation increased moderately,
averaging between 2% and 3.3%. The 2008 financial crisis slightly impacted inflation, but it did not
reach the high levels observed in the early 1990s. In 2011, inflation reached 11.4% and then fell to
6.22% in 2012. From 2017 to 2022, consumer prices fluctuated moderately between 5.5% and 7.7%,
reflecting some volatility. A relative stability of approximately 5.5% between 2016 and 2019 was
followed by a worrying surge to 7.69% in 2022, possibly due to supply chain disruptions and
widespread inflationary pressures heightening worries about economic instability.
Overall, the trend of inflation and unemployment in Bangladesh from 1991 to 2022 is upward. As a
result of stagflation, the increasing rate of unemployment and inflation in Bangladesh is highly
concerning. These findings indicate a lack of macroeconomic performance in the economy. Therefore,
the Phillips curve depicts the trade-off relationship between inflation and unemployment, which is
useful in determining economic policy in the face of high inflation and unemployment. Hence, the
purpose of this study is to investigate the existence of the Phillips curve to aid policymakers in
eliminating stagflation in Bangladesh.

1.2 Statement of Research Questions

The following research questions are raised to identify a solution to the problem of stagflation outlined
in this study:
i. Does Bangladesh have a short-run trade-off between unemployment and inflation?
ii. Is there a statistically significant relationship between the specified explanatory variables and
unemployment as a dependent variable in Bangladesh?

2. Literature Review
Theoretical Review:
The relationship between unemployment and the rate of change in money wages was originally studied
by A.W. Phillips in his seminal paper “The Relationship between Unemployment and the Rate of
Change of Money Wage Rates in the United Kingdom 1861–1957,” and Phillips concluded that there
was a negative association between the rates of unemployment and inflation (Odo et al., 2017). In
addition, he conducted an analysis based on data and came to the empirical conclusion that there is a
low rate of increase in money pay when unemployment is high. Phillips' hypothesis has a relatively
straightforward logic: if there is an excessive demand for labour compared to supply, equilibrium wage

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rates should rise above present wage levels, and firms bidding for more workers would push nominal
wages upwards (Orji et al., 2015). Indeed, the unemployment rate decreases when more people are
hired. Moreover, the greater the disparity between the amount of labour required and the amount
available, the more force is exerted on the pay rates. Consequently, when there is a surplus of available
labour and unemployment rates are growing, the converse would be true.
As cited in Hafnati & Syahnur (2018), Samuelson and Solow (1960) conducted an empirical
investigation on the relationship between the unemployment rate and inflation in the U.S. and
discovered a trade-off. According to Orji et al. (2015), however, the inverse relationship between
unemployment and inflation shattered during the 1970s, and the majority of OECD member states
experienced stagflation and high unemployment combined with high inflation. Despite the fact that
the Phillips curve was unable to account for stagflation, a new relationship between unemployment
and inflation, specifically the inverse relationship between changes in inflation and unemployment,
was found. Hence, the modified Phillips curve was based on this relationship, which is still relevant
and valid for many industrialised nations. In addition, Friedman (1968) and Phelps (1967) offered
more insight into the Phillips curve phenomenon, which was supported by Lucas (1976), who argued
that there will be only a short-term trade-off between unemployment and inflation rates. However, this
will not happen in the long-run because monetary policy makers will eventually encounter a vertical
Phillips curve, where the unemployment rate tends to be at its natural rate, or so-called nonaccelerating
inflation rate of unemployment (NAIRU), and because the current monetary policy will have an impact
on more than just the inflation rate (Hafnati & Syahnur, 2018). The short-run and long-run Phillips
curves are illustrated in the following figure.

Figure-2: A Hypothetical Phillips Curve (both short-run and long-run).

Source: (The Short Run and Long Run Phillips Curve - Google Search, n.d.).

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Empirical Review:
There is an inverse link between the unemployment rate and the inflation rate, according to the Phillips
curve, which has been the focal point of multiple studies employing various time periods, regions, and
methodologies. However, what we have learned from investigating the theoretical and empirical
connections between unemployment and inflation from several studies in this area is still debated. This
is because some of these studies produced a number of contradictory and contrasting findings. While
many of these empirical studies revealed positive or insignificant relationships, a number of them
supported the opposite relationship between the unemployment rate and the inflation rate. Table-1
provides a quick overview of some of these studies.
Table-1: Selected Literature Review.

Author(s) Country Period Variables Method Findings

(Year) Sample

Odo et al. Nigeria 1980-2015 Inflation, money VECM The unemployment rate
(2017) supply % GDP, (Vector was significantly impacted
total Error by inflation in both the
government Correction short and long-term and the
expenditure % Model), variables in the mode have
of GDP Granger a significant causal link
Causality with one another.

Orji et al. Nigeria 1970-2011 CPI, OLS There is a positive

(2015) unemployment Estimation relationship between
rate, growth rate inflation and the
of money unemployment rate, and
supply, budget unemployment is a major
deficit, real factor influencing
GDP, interest inflation.
rate, the lag of
current interest
rate

Hafnati Indonesia 1991-2016 Inflation rate, VECM Unemployment showed

& Syahnur unemployment negative and significant
(2018) gap effects on inflation.

Sinha India 1991-2016 Inflation rate, VECM There is no short-term

(2017) unemployment causal relationship
rate between unemployment
and inflation. The results
support the notion that the
Phillips curve exists in
the long-term in India.

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Kubendran India 1968-2018 Inflation, VECM This study has found a
(2023) unemployment, long-term association
money supply, between unemployment,
GDP inflation, and the money
supply, demonstrating the
applicability of the Phillips
curve.

Naqibullah Malaysia 1991-2018 Inflation, ARDL There is no short-term

et al. unemployment correlation between
(2020) unemployment and
inflation.

Simionescu Romania 1990-2013 Inflation, ARDL In Romania, there is a

(2014) unemployment, short-term negative
broad money, correlation between
GDP inflation and the
unemployment rate and a
long-term positive
correlation.

Bokhari Saudi 1988-2017 Inflation, VECM In the Saudi economy,

(2018) Arabia unemployment there was no convincing
evidence of a short-term
trade-off between inflation
and unemployment.

Veljanoska Macedonia 1993-2018 Inflation, Granger Macedonia does not fit the
(2019) unemployment Causality Phillips curve, and it is not
possible to determine the
values of one variable by
estimating the rate of
another.

Rasna Banglades 1996-2010 CPI, Var and There is no Phillips curve

(2010) h unemployment, Granger in the long-term in
international oil Causality Bangladesh. Once more, a
price shock unidirectional positive
causal relationship
between the rate of
unemployment and the rate
of inflation is found, which
is completely in conflict
with the Phillips curve's
predicted relationship. The
key discovery is that
Bangladesh is clearly
experiencing stagflation.

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 Karahan & Turkey 1996-2016 Inflation, ARDL The unemployment rate
Uslu unemployment has a negative long-term
(2018) impact on the inflation rate
and is statistically
significant. The long-term
trade-off between
unemployment and
inflation has been
identified, although the
short-run coefficient from
the ARDL model is not
statistically significant.

3. Objectives of the Study

The general objective of this study is to investigate the existence of the Phillips curve in Bangladesh
in the short-run by using time series data from 1991–2022.
The more specific objectives are as follows:
i. To estimate the short-run trade-off between the inflation and unemployment rate proposed by
the Phillips curve hypothesis.
ii. To explore the impact of the one-period lag value of the inflation rate, money supply (% of
GDP), and GDP per capita growth rate on the present unemployment rate in Bangladesh.
iii. To inspect whether past inflation values could be used to forecast future unemployment rates
from the perspective of adaptive expectations.
Despite the availability of multiple studies that have evaluated the Phillips curve hypothesis, there is
still a shortage of practical studies that study this theory in developing countries such as Bangladesh.
This study differs from previous related research in that it integrates the most recent time series data
and analyses the dataset using robust econometric approaches that were not previously used. The
findings of this study might assist policymakers in developing better policies to attain their goals of
price stability and full employment in Bangladesh. It will also aid future research scholars, academic
students, economists, educational institutions, and other academics.
This paper has been organised into nine separate sections. The next section describes the methodology
utilised in this study, while the fifth section assesses the data and discusses the estimation findings.
The sixth section summarises the study's main results. Finally, the seventh, eighth, and ninth sections
include a brief conclusion, policy recommendations, and limitations of the study, respectively.

4. Methodology
4.1 Research design
This study employed an ex-post factor research design since the data used are already available and
cannot be modified.

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 4.2 Model Specification
The research centres on the Phillips curve hypothesis, which states that the relationship between
inflation and unemployment regarding the short-run aggregate supply (SAS) curve is inverse (Odo et
al., 2017). As a result, as the economy ascends up the SAS curve towards a higher price level and
higher output, unemployment decreases. However, because prices are higher, inflation is on the rise.
To reduce unemployment rates, an increase in inflation must be surrendered. Thus, the Phillips curve
is composed of several equations, as follows:

π = 𝜋 𝑒 − 𝛽 (𝑢 − 𝑢∗ ) + 𝜐 —— (1)

where
π = Inflation
𝜋 𝑒 = Expected inflation
𝛽 = A parameter that quantifies the responsiveness of inflation to cyclical unemployment.
(𝑢 − 𝑢∗ ) = Cyclical unemployment
𝜐 = Supply shocks.

To determine the impact of inflation on unemployment, equation (1) is reversed:

𝛽 (𝑢 − 𝑢∗ ) = 𝜋 𝑒 − 𝜋 + 𝜐 —— (2)

This study employs and modifies the model specifications of Odo et al. (2017) to determine the
existence of the Phillips curve in Bangladesh. Due to data shortages, the study differs by integrating
the independent variable GDP per capita growth (annual %) instead of total government expenditure
(% of GDP). To accommodate the variables used in the present study, equation (2) appears to be
functional:
UNEM = f (INF, BMGDP, GDPPCG) —— (3)
where
UNEM = Unemployment, total (% of total labor force)
INF = Inflation, consumer prices (annual %)
BMGDP = Broad money or money supply or M2 (% of GDP)
GDPPCG = GDP per capita growth (annual %)
Equation (3) is expressed in linear form with a one-year lag for estimation as follows:
UNEMt = 𝛽 0 + 𝛽 1 INFt-1 + 𝛽 2 BMGDPt-1 + 𝛽 3 GDPPCG t-1 + µt —— (4)

where
UNEM, INF, BMGDP, and GDPPCG are as explained above;
𝛽 0 = Constant term
𝛽 1 to 𝛽 3 = Regression coefficients of the independent variables, respectively;
µt = Error term

4.3 Data Discussion

In this study, an econometric analysis is performed on annual time series data from 1991 to 2022. The
secondary dataset is taken from the World Development Indicators, 2023 (DataBank | The World
Bank, n.d.). The dependent variable in this study is total unemployment (% of total labour force), while

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the independent variables are one-period lagged values of inflation, consumer prices (annual %), broad
money or money supply or M2 (% of GDP), and GDP per capita growth (annual %). STATA 14 data
analysis software is used for quantitative computations. Thenceforth, the mean values indicate the
average value of the corresponding variables, while the standard deviation quantifies the amount of
spread or dispersion of the corresponding data points around the mean. Table-2 provides
comprehensive explanations of all the variables specified:
Table-2: The Description of Data and Variables.
Source: Author’s calculation using STATA 14.

Variables Description of the Variables Mean Standard Source

Deviation

UNEM The share of the labour force that is unemployed 3.77 0.9025
but looking for work is known as unemployment
(% of the total labour force).

INF Inflation (annual %) refers to the annual percentage 6.14 2.2244

change in the cost to the average consumer when
purchasing a basket of goods and services that may
be fixed or altered at specific periods, such as
yearly. The Laspeyres technique is commonly used
to calculate it.

BMGDP The sum of currency on the outside banks, demand 13.87 24.0087
deposits apart from those of the central (DataBank
government, time, savings, and foreign currency | The
deposits of resident sectors other than the central World
government, traveller's and bank checks, as well as Bank,
other securities such as certificates of deposit and
n.d.)
commercial paper, are referred to as broad money
or money supply or M2 (% of GDP).

GDPPCG GDP per capita growth (annual %) refers to the 1.45 1.5005
annual percentage rate of increase of GDP per
capita in constant local currency. GDP per capita is
calculated by dividing the GDP by the midyear
population. GDP, measured at purchaser's prices, is
the sum of the gross value added to the national
economy by all domestic producers, plus any taxes
on goods, and minus any government subsidies that
are not incorporated into the product values. It is
determined without accounting for fabricated asset
depreciation or natural resource depletion and
degradation.

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 4.4 Estimation Procedure
The ADF (Augmented Dickey-Fuller) and PP (Phillips Perron) unit root tests are used as pretests to
determine variable stationarity. The ARDL (Autoregressive Distributed Lag) bound test and the OLS
(Ordinary Least Squares) approach are also used to determine the econometric method of analysis.

5. Empirical Results and Discussions

5.1 ADF (Augmented Dickey-Fuller) Unit Root Test
Because we are working with time series variables created by a random procedure, we must first assess
whether the stochastic process is stationary (Odo et al., 2017; Orji et al., 2015). Accordingly, a variable
is stationary when the absolute ADF value (|τ|) is greater than either of the absolute tau critical values.
And the ADF test is a parametric test. Here, the ADF test is used to determine the presence of the unit
root in all of the time series without a trend and a drift since this study focuses on short-run
relationships.
Hypothesis testing: H0: δ=0 (There is a unit root, indicating that the time series is nonstationary).
H1: δ<0 (Otherwise, the time series is created by a stationary process).
Decision rule: If |τcal|>|τtab|, the null hypothesis is rejected; otherwise, the result cannot be rejected.
Table-3 summarises the ADF test outcomes. The optimal lag is chosen using the SIC (Schwarz
information criterion).
Table-3: ADF Unit Root Test Results.
Source: Author’s calculation using STATA 14.

Variables ADF Test Statistics 5% ADF Critical Order of

Values Integrations
UNEM -6.120 -2.986 I(1)
INF -4.019 -2.983 I(0)
BMGDP -4.287 -2.986 I(1)
GDPPCG -3.422 -2.992 I(1)

According to the ADF test for the unit root in Table-3, only INF is stationary in level form; however,
UNEM, BMGDP, and GDPPCG are stationary at first differences. On this basis, we reject the null
hypothesis of nonstationarity and establish that the variables are stationary at level and first differences,
respectively.

5.2 PP (Phillips Perron) Unit Root Test

The Phillips Perron employs nonparametric statistical approaches to account for serial correlation in
error terms without the addition of lagged difference terms (Odo et al., 2017). Accordingly, a variable
is stationary if the absolute PP value (| |) is greater than any of the absolute tau critical values. Here,
the PP test is used to determine the presence of the unit root in all of the time series without a trend
and a drift since this study focuses on short-run relationships.
Hypothesis testing: H0: δ=0 (There is a unit root, indicating that the time series is nonstationary).
H1: δ<0 (Otherwise, the time series is created by a stationary process).

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Decision rule: If | cal|>| tab|, the null hypothesis is rejected; otherwise, the null hypothesis cannot be
rejected. Table-4 summarises the PP test findings. The optimal lag is chosen based on SIC.
Table-4: Phillips Perron Unit Root Test Results.
Source: Author’s calculation using STATA 14.

Variables PP Test Statistics 5% PP Critical Order of

Values Integrations
UNEM -6.120 -2.986 I(1)
INF -4.019 -2.983 I(0)
BMGDP -4.287 -2.986 I(1)
GDPPCG -9.390 -2.986 I(1)

According to the PP test for the unit root in Table-4, only INF is stationary at the level form;
nevertheless, UNEM, BMGDP, and GDPPCG are stationary at first differences. On this basis, we
reject the null hypothesis of nonstationarity and establish that the variables are stationary at level and
first differences, respectively.

5.3 The ARDL (Autoregressive Distributed Lag) Bound Test

The ARDL approach is employed after determining the degree of integration of the series (Dereli,
2019). Accordingly, when the variables in the model are stationary at different orders of integration,
the ARDL bound testing technique is applied.
Hypothesis testing: H0: There is no long-run relationship among the variables involved.
H1: Otherwise.
Decision rule: The ARDL approach employs two asymptotic critical bounds.
Accept H0 if F < Critical Lower Bound
Reject H0 if F > Critical Upper Bound
If the F-statistic value produced exceeds the critical upper bound, the null hypothesis, which states that
there is no long-run relationship among the variables, is rejected (Alper, 2017). Furthermore, if the F-
statistic is less than the crucial lower bound, the null hypothesis cannot be rejected, implying that no
long-run relationship exists among the variables. The optimal lag is chosen here according to the SIC.
Since this study focuses on the short-run relationships, the robust strategy is Case-3 (unrestricted
intercepts and no deterministic trends) of the ARDL test (Riz, 2016). The ARDL test outcomes for
equation (4) are shown in Table-5.
Table-5: The ARDL Bound Test Results.
Source: Author’s calculation using STATA 14.

F-statistic Level of Significance Lower Bound Upper Bound

[critical value for I(0) [critical value for I(1)
regressors] regressors]
1% 4.29 5.61
1.192 5% 3.23 4.35
10% 2.72 3.77

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Since the F test result of equation (4) is less than the lower and upper limits at the 1%, 5%, and 10%
significance levels, no long-run relationships among the variables tested are identified, as shown in
Table-5.

5.4 ARDL Model with Long-run and Short-run Dynamics

The ARDL test uncovers the error correction mechanism (ECM) that amends for disequilibrium (Orji
et al., 2015). This approach involves aligning economic variables' short-run and long-run behaviour.
To restore equilibrium to the dependent variable, the sign of the coefficients is presumed to be negative.
Table-6: The Error Correction Modelling (ECM) of the Dependent Variable (UNEMt).
Source: Author’s calculation using STATA 14.

The Long-Run Coefficients

Variables Coefficients Probability

INFt-1 -0.0284171 0.841

BMGDPt-1 0.0548792 0.058

GDPPCG t-1 -0.0884874 0.784

The Short-Run Coefficients

Variables Coefficients Probability

Constant 0.7255369 0.086

INFt-1 -0.0094901 0.806

BMGDPt-1 -0.0134373 0.646

GDPPCG t-1 -0.0765647 0.338

Speed of Adjustment (ECM Coefficient)

Variable Coefficient Probability

UNEMt -0.3534773 0.058

The relationship between UNEMt and INFt-1 is negative in both the short and long-run, which is
statistically insignificant, as shown in Table-6. The results for UNEMt and GDPPCGt-1 are identical.
UNEMt and BMGDPt-1 have a statistically insignificant positive relationship in the long-run. In the
short-run, however, the relationship is negative and statistically insignificant.
The ECM coefficient contains information on whether previous values of variables affect present
values (Orji et al., 2015). As shown in the Table-6, the error correction term is estimated to be -
0.3534773, implying that 35.34% of the shocks from the previous year were resolved in the current
year. Furthermore, the sign of the ECM coefficient is negative and statistically insignificant, showing
that the system fluctuates to equilibrium and that this fluctuation decreases with each iteration,

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providing a long-run return to equilibrium. In addition, the Phillips model has approximately 35.34%
disequilibrium. This implies that to maintain equilibrium among the variables in Bangladesh, the
disequilibrium over time should be reduced.

5.5 Presentation and Interpretation of the OLS Estimates

The results of the OLS estimates for equation (4) are presented in the table below:
Table-7: The OLS Estimates Results (Dependent Variable: UNEMt).
Source: Author’s calculation using STATA 14.

Variables Coefficients T-Statistics Probability R2 R2 F-

(Adjusted) Statistics
Constant 1.602186 4.60 0.000
term
INFt-1 -0.0411332 -0.93 0.358 21.11
0.7011 0.6679 (Prob > F
BMGDPt-1 0.0494902 5.17 0.000 = 0.0000)

GDPPCG t-1 0.0580721 0.62 0.541

The model output is thus stated as follows based on the regression result:
UNEMt = 1.602186 - 0.0411332 INFt-1 + 0.0494902 BMGDPt-1 + 0.0580721 GDPPCG t-1+ µt
According to Table-7, the coefficient of INFt-1 is -0.0411332, which is statistically insignificant. This
means that, ceteris paribus, a unit increase in the rate of INFt-1 results in a 4.11% drop in UNEMt. This
sign is consistent with the Phillips curve hypothesis's postulation of a negative (inverse) relationship
between the unemployment rate and the inflation rate. A priori presumptions are not met since the
relationship is statistically insignificant. As a result, the inability of these variables to meet a priori
expectations demonstrates that the Phillips curve relationship does not exist in Bangladesh.
According to the coefficient of 0.0494902 in Table-7, ceteris paribus, a unit increase in money supply
(BMGDPt-1) raises the rate of unemployment (UNEMt) by approximately 4.95% on average, which is
statistically significant. Furthermore, GDP per capita growth (GDPPCGt-1) has a positive but
insignificant impact on the unemployment rate (UNEMt) with a coefficient of 0.0580721. This implies
that, everything else being equal, a one-unit rise in BMGDPt-1 raises the unemployment rate by 5.81%
on average.
The regression results in Table-7 yield a coefficient of determination (R2) of 0.7011, whereas the
adjusted R2 is 0.6679. This means that the independent variables in the model account for 66.79% of
the variability in the dependent variable, while the variables outside the model account for 33.21%.
Furthermore, F-statistics show that all of the independent variables influence the dependent variable
significantly at the 5% level of significance.

6. Summary of the Major Findings

The purpose of this study is to empirically explore the presence of the Phillips curve hypothesis in
Bangladesh between 1991 and 2022. To meet the study's objectives, a secondary dataset is gathered

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from the World Development Indicators, 2023 (DataBank | The World Bank, n.d.). To assess the
dataset, the ADF test, Phillips Perron (PP) test, ARDL bound test, and OLS econometric techniques
are employed.
The following are the key inferences drawn from the econometric approaches used to estimate equation
(4):
1. ADF Test: The dependent and independent variables are stationary at different orders of
integration.
2. PP Test: The dependent and independent variables are stationary at different orders of
integration.
3. ARDL Bound Test: There is no statistically significant relationship between the dependent
and independent variables, both in the short-run and the long-run.
4. OLS Test: Except for the positive relationship between unemployment and the money supply,
there is no statistically significant relationship between the dependent and independent
variables. At the 5% level of significance, however, all of the independent variables are jointly
significant.
In conclusion, the preceding econometric tests show that there is no trade-off relationship between
unemployment and inflation in the short as well as in the long-run. This implies that the Phillips curve
did not exist in Bangladesh from 1991 to 2022.

7. Conclusion
The two major macroeconomic variables, unemployment and inflation, are the key issues affecting the
economy of Bangladesh, resulting in complicated economic and social repercussions. One of the major
goals of policymakers is to reduce unemployment and control inflation. For this reason, this study
aimed to explore the Phillips curve as a useful instrument for controlling the functioning of the
economy.
To determine whether the Phillip curve holds in Bangladesh, this empirical study is conducted to
determine the short-run trade-off between unemployment and inflation. Therefore, the study analyses
data from 1991 to 2022, encompassing three decades. To achieve this objective, the unemployment
rate is employed as a dependent variable, while one-period lagged values of inflation, money supply,
and GDP per capita growth are included as independent variables in the study. Following an analytical
review and using the ARDL bound test as well as the OLS technique, the specified model has been
estimated along with the ADF and PP unit root tests. The long-run and short-run ARDL results suggest
an inverse relationship between inflation and unemployment, although this relationship is not
statistically significant. The OLS approach yields similar results, except for the positive relationship
between unemployment and the money supply, which is statistically significant. Specifically, the
research reveals that past inflation rates cannot be used to forecast future unemployment rates.
Furthermore, the research demonstrates that the Phillips curve is not relevant to Bangladesh. As a
result, robust institutional coordination is required to address these two macroeconomic variables.
To empirically assess the relationship between inflation and unemployment, numerous studies with
different country groups and time periods were conducted, with varying findings. Several studies
performed to determine if the Phillips curve was valid in Bangladesh concluded that it existed, while

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others concluded that it was not. The different results obtained in these studies indicate that the
methodologies used in the analysis and the study periods differed.
As a result of the period mentioned and the analysis performed, this study concludes that the Phillips
curve is invalid for Bangladesh. These findings correspond to the conclusions reached in the research
studies conducted by Rasna (2010) in Bangladesh; Haq et al. (2012) in Pakistan; Orji et al. (2015) in
Nigeria; Sinha (2017) in India; Karahan & Uslu (2018) in Turkey; Innocent & Irmiya (2019) in
Nigeria; Veljanoska (2019) in Macedonia; Bokhari (2020) in Saudi Arabia; Yildiz (2021) in Turkey;
and Naqibullah et al. (2021) in Malaysia.

8. Policy Recommendations
The trade-off relationship between unemployment and inflation is subject to the economy and depends
on the nature and structure of the economy (Rasna, 2010; Haq et al., 2012). Yildiz (2021) stated that
the actions that need to be adopted to lower the inflation rate and the policies to be implemented to
lower the unemployment rate will not be successful when the Phillips curve is invalid. Therefore,
measures that ensure price stability and lower the unemployment rate can be implemented
simultaneously in an economy where the Phillips curve is invalid. To increase the effectiveness of such
initiatives, it is imperative to precisely identify the root causes of rising unemployment and inflation.
The following policy recommendations were suggested by Veljanoska (2019) and Orji et al. (2015),
respectively, for the economies where the Phillips curve is invalid and where stagflations exist:
1. It is not possible to forecast future unemployment rates using historical inflation data, and vice
versa. That is, the rate of one variable cannot be used to calculate the values of another variable.
2. To combat the threat of unemployment and inflation, as well as to lessen the issue of stagflation,
the government and monetary authorities should implement suitable policies and diversify the
economy. Again, managing these two macroeconomic factors, unemployment and inflation,
requires robust institutional cooperation.
According to the current study, there is no trade-off between inflation and unemployment, which
indicates that measures taken to maintain price stability will not result in more unemployment or that
measures taken to lower the unemployment rate will not increase inflation. Although the long-run and
short-run ARDL results reveal no statistically significant results between the dependent and
independent variables, the OLS approach yields a positive relationship between the unemployment
rate and the money supply, which is statistically significant. Therefore, the following measures can be
taken by the respective authorities to eliminate stagflation in Bangladesh:
1. When formulating policies, policymakers may take the absence of a relationship between
unemployment and inflation into account. That is, past inflation rates might not be used to
forecast future unemployment rates.
2. Policymakers might implement contractionary monetary policy to reduce unemployment rates
without fear of its adverse impacts on inflation rates.

9. Implications, Limitations and Scope for Future Research

This empirical study examines the trade-off between inflation and unemployment but finds no
existence of the Philips curve in Bangladesh throughout the research period. In addition, this study
reveals that past inflation rates cannot be used to forecast future unemployment rates. These findings

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have significant implications for policymakers who are deciding on the best macroeconomic strategies
to achieve macroeconomic goals. They might consider the Phillips curve when developing new
policies and strategies to boost the Bangladesh economy in the future.
This study has certain limitations as well as potential future implications. For example, the budget
deficit, interest rate, and exchange rate are not included in this analysis. Furthermore, in most
developing countries, such as Bangladesh, obtaining adequate data on unemployment to perform
econometric analysis is more challenging. The inclusion of several crucial variables may have resulted
in a more robust estimation of the models. Furthermore, the research might be expanded to identify
the actual factors for which the Phillips curve test is not applicable to Bangladesh.
The present study limited the use of the Philips curve to the Bangladesh economy only. It may be
extended to emerging economies as well as other developing nations, with more important variables,
particularly for South Asian Association for Regional Cooperation (SAARC) members like India,
Pakistan, Sri Lanka, Nepal, the Maldives, and Bhutan.

Funding information: This paper received no funding.

Conflict of interest: There are no conflicts of interest among the authors or with any other authority.
Acknowledgment: We would like to express our gratitude to Associate Professor Dr. Farhana Ahmed,
Department of Economics, Shahjalal University of Science and Technology, Sylhet-3114, Bangladesh;
for her assistance and supervision in ensuring the overall quality of the paper.

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