The relationship between the short-term and long-term Phillips curve for the Czech Republic

Abstract

Inflation in Czech Republic in 2021 significantly deviated from the tolerance band. Although the economic results are lagging behind expectations, inflationary pressures, mainly from abroad, are still intensifying. At the same time, the rapid rise in consumer prices affects not only households and consumers, but also business and companies. As is known, a very important tool for understanding inflation is the Phillips curve, which shows the relationship between two variables, the first one is inflation and the second one is unemployment. The aim of this paper is to research the relationship between the short-term Philips curves and long-term Phillips curves for the Czech Republic. For this purpose, data on the inflation rate and unemployment rate between 1993 and 2018 were contrasted based on data published by the Czech Statistical Office. The short-term Phillips curve was assumed under adaptive expectation conditions, whereby a regression analysis was undertaken using SPSS statistical software to determine suitable values for the corresponding parameters. In addition, and in accordance with the trend figure and data description figure for both the unemployment rate variable and inflation rate variable, the basis for the development of the long-term Phillips curve is described. Subsequently, it is concluded that a mutually substitutive relationship exists with regards to the short-term and that the long-term is an irregular circular curve that moves in a clockwise direction.