Inflation–Unemployment Trade-off: Evidence from Bangladesh Economy

Abstract

The Phillips curve is a central hypothesis in inflation dynamics which describes the relationship between unemployment and inflation. The key point of this study is to investigate the relevancy and validity of the Phillips curve hypothesis for Bangladesh over the period 1987–2009. The study attempts to evaluate two important extensions of original Phillips curve hypothesis named expectation augmented and supply shock augmented Phillips curve. Following an analytical review and using the Ordinary Least Squares technique, three models have been estimated along with specification tests, the Augmented Dickey–Fuller (ADF) unit root test and the Chow test. The data exhibits an inverse relation between inflation and unemployment in Bangladesh. The result gives an indication of the relevancy of the Phillips curve in the Bangladesh economy. The study results reveal that inflation lag, which is positively associated with inflation, strongly explains the current inflation dynamics. The other influencing factors, such as unemployment gap and change in exchange rate, are negatively correlated and change in international price of crude oil is positively correlated with inflation.