Inflation, unemployment and government popularity—Dynamic models for the United States, Britain and West Germany

Abstract

There has been numerous attempts to model the relationship between unemployment, inflation, other economic variables and government popularity in a variety of industrial countries. However, there is conflicting evidence about the magnitude and significance of effects both between different countries, and within the same country at different points of time. The purpose of this article is to examine the existing literature, to provide a critique of the theoretical and statistical validity of many existing studies, and to specify and estimate a dynamic model of the relationship between inflation, unemployment and government popularity in three countries over the post-war period. This model is a multivariate transfer function with an autoregressive-moving average error structure which has been developed in its general form by Box and Jenkins. The results demonstrate significant relationships between inflation, unemployment and government popularity, but relationships which are relatively weak and unstable over time.