Non linear equilibrium relationship between inflation and employment: evidence from Côte D ivoire

Abstract

Purpose- The main objective of this paper is to test the existence of a stable long-run relationship between price level and employment for an African country. Methodology- This paper employs two types of co-integration and error correction methodologies: the Engel-Granger cointegration model which assumes symmetric adjustment toward equilibrium and a Threshold co-integration approach that considers asymmetric adjustment toward equilibrium. Before making cointegration analysis we apply unit root test to check for the stationnarity of the series. Findings- We found evidence of a stable long-run relationship between price level and employment in Cote d’Ivoire and a positive relationship between the two variables. However, the adjustment towards the equilibrium is asymmetric since positive shocks are absorbed more rapidly than negative ones. Moreover, there was no causality between the two variables in the short run. Conclusion- The results indicate that in Cote d’Ivoire, inflation stability may be incomptaible with employment maximization. So to reduce unemployment rate, it is necessary to accept a certain level of inflation rate.