The Twinning of Inflation and Unemployment Phenomena in Saudi Arabia: Phillips Curve Perspective

Abstract

The global economy has witnessed many economic fluctuations and waves of inflation and recession. With the consideration of achieving price stability as a primary goal of the economic policies, any attempt to eliminate inflation means accepting higher rates of unemployment, and vice versa. This conflict relationship was explained by the Economist “Phillips”, who developed the inflation/unemployment curve. After the emergence of the stagflation phenomenon, this relationship became an object of argument and skepticism. Therefore, the key point of this study is to investigate the tradeoff relationship between inflation and unemployment in the Kingdom of Saudi Arabia for the period 1988-2017. The co-integration and error correction approaches have been utilized, to determine the equilibrium relations in the long-run and short-run, and the causality direction between the two phenomena. Johansen test indicated that a long-run co-integration relationship was existed. Based on Vector Error Correction Model (VECM), results provide evidence in favor of the long-runs negative causation running from unemployment to inflation. Contrary to expectation, there was no significant evidence of short-run tradeoff between unemployment and inflation in the Saudi economy.