Abstract
The Phillips curve shows the trade-off relationship between the inflation and unemployment rates. A rise in inflation due to the high economic growth, more jobs are available and therefore unemployment will fall. However, the existence of the Phillips curve in high-income countries has not been much discussed. Countries with high income should have low unemployment rate, suggesting a high inflation. However, some high-income countries, the United States in 1970s for example, could not avert stagflation whereby high unemployment rate and inflation occurred in the same time. This situation is contrary to the Phillips curve. Therefore, this study aims to investigate the existence of the Phillips curve in high-income countries for the period 1990-2014 using the panel data analysis. The most interesting finding of this study is the existence of a bidirectional relationship between unemployment rate and inflation rate in both long and short runs. Therefore, the governments should choose to stabilize inflation rate or reduce unemployment rate
Highlights
Phillips [12] introduced the Phillips curve, which illustrates the trade-off relationship between the inflation and unemployment rates
The Autoregressive Distributed Lag (ARDL) Bounds test was conducted and the findings showed that unemployment negatively affects inflation in the short run but there is no causal connection in the long run
The results show that there is a significant effect of unemployment rate on inflation rate with feedback in the long run
Summary
Phillips [12] introduced the Phillips curve, which illustrates the trade-off relationship between the inflation and unemployment rates. A wrong decision on policies can aggravate the economy Numerous studies, such as those of Resurreccion 13] in Philippines, Al-zeaud and Al-hosban [1] in Jordan, and Furuoka and Munir [5] in Malaysia, have investigated the existence of the Phillips curve in various countries. Inflation can drive workers to demand higher wages to adjust their real income It can result in higher production cost. The profits of firms fall and ensue layoffs This situation is contrary to the Phillips curve. This study aims to investigate the existence of the Phillips curve in high-income countries in both short and long runs
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