RELATIONSHIP BETWEEN INFLATION AND UNEMPLOYMENT: THE ARDL BOUND TESTING APPROACH FOR TURKEY

Abstract

Inflation and unemployment are among the most important economic and social problems encountered by both developed and developing countries. As countries are trying to lower inflation and maintain price stability, they also strike to increase production and hence economic growth by lowering unemployment rates. Therefore, policymakers are committed to these two variables. The relationship between inflation and unemployment is examined by the Phillips Curve approach in macroeconomics literature. This approach suggests that an inverse relationship exists between inflation and unemployment. In other words, higher inflation rate results in lower unemployment and lower inflation rate leads to higher unemployment. This study aims to test the validity of the Phillips Curve throughout the years 1987-2016 by the ARDL approach regarding the Turkish economy. In the analysis, the stability of the series is examined first, and then the cointegration test is utilized to investigate whether or not a long-term relationship exists between the series. As a result of the cointegration analysis, it is concluded that there is no long-term relationship between the variables in the model where the inflation is considered as the dependent variable. The unemployment rate is taken as the dependent variable, the existence of a long-run relationship among the variables included in the analysis would be determined.