Abstract
In this paper is presented a theoretical model finalized to explain the effects of the economic cycle on the real GDP growth rate of a given country's economy towards a selected business partner. In other words, the present paper expose an innovative theoretical model, based on the expectations-adjusted Phillips Curve and on the Okun's law, which proposes the existence of a relationship between the difference in the effective inflation rate and in the expected inflation rate of the national economy of a generic country (inflation gap), and the growth rate of the real GDP of the national economy and of its corresponding commercial partner, both determined by the different phases of the economic cycle. The two economies examined, for the purpose of empirical verification, are Germany and the group of the countries belonging to the euro area, considered, as a whole, as a single economy. The considered sample period ranges from the first quarter of 1999 to the first quarter of 2018. The result to which the authors arrive, appropriately verified with econometric models, indicates not only the existence, the significance and the robustness of the relationship established by it but also the ability of the model to predict, with good precision, the effects of the economic cycle on the real GDP growth rate, given the inflation gap.
Highlights
The international economy offers numerous theories to explain the effects of some variables, such as the nominal exchange rates, the interest rates and the inflation rates, on the competitiveness of a certain economy towards its partners
The main aim of this paper is to present a theoretical model, based on the expectations-adjusted Phillips Curve and on the Okun’s Law, in which, given a country and its generic business partner, the difference between the effective inflation and the expected inflation in a given country is related to the effects of the economic cycle on the GDP of the national economy and of the economy of the considered partner
The authors pointed out that, in the case of Germany, the exports towards the countries of the euro area depend negatively on the effects of the economic cycle, while the imports from the countries belonging to the European single currency are rigid compared to the latter
Summary
The international economy offers numerous theories to explain the effects of some variables, such as the nominal exchange rates, the interest rates and the inflation rates, on the competitiveness of a certain economy towards its partners. The main aim of this paper is to present a theoretical model, based on the expectations-adjusted Phillips Curve and on the Okun’s Law, in which, given a country and its generic business partner, the difference between the effective inflation and the expected inflation in a given country is related to the effects of the economic cycle on the GDP of the national economy and of the economy of the considered partner In this model, finalized to explain the effects of the economic cycle on the GDP growth rate and useful for forecasting purposes, the authors present a linear relationship that links the difference between the effective inflation rate and the expected inflation rate (inflation gap) of the national economy, with the difference between the cosine of the real GDP growth rate of the national economy and the cosine of the growth rate of the real GDP of the trading partner. The authors hope, that the paper is a very useful for stimulating research at the interface of mathematics and economics (useful, namely, in bridging economics and mathematics, in particular) and that it builds a link that can become advantageous for both disciplines involved
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