Investigation Of Phillips Curve In South Asian Economies Economics Essay

The relationship between monetary value rising prices and unemployment has ever been a point of focal point for the policy shapers. As the historically negative relationship has been observed between rising prices and unemployment in many economic systems which implies that if authorities seeks to cut down the rising prices rate the unemployment goes up and if it wants to bask the lower unemployment it has to bear the load of rising prices. The present paper is an attempt in this respect to place this phenomenon for the South Asian Economies which include four states Pakistan, India, Bangladesh and Sri Lanka. The work has been carried out by taking into history the 30 old ages historical rates of rising prices and unemployment for all four states. Findingss of this paper suggest that there is no relationship between rising prices and unemployment on aggregative degree. In add-on, the separate analysis of each state shows that, the relationship between rising prices and unemployment is positive in Pakistan and negative in Bangladesh, while at the same clip the independent motion has been observed of the two variables in India and Sri Lanka. The negative impact of lifting rising prices over unemployment is really the being of theoretical Phillips Curve which is evidenced by Bangladesh and it seems to be a consequence of migration of people towards employment beginnings. There is no being of Phillips Curve in Pakistan, India and Sri Lanka.

Cardinal Wordss: Inflation ; Unemployment

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Introduction

Phillips Curve shows an opposite relationship between the rate of rising prices and the rate of unemployment in an economic system. While it has been seen that there is a stable short tally trade-off between these two, but it has non been observed for the longer clip. This relationship theory has been tested many times for eastern every bit good as western economic systems. Having a figure of surveies, there is still a contradiction about the theory. The present paper is besides an effort in this respect to place this relationship in South Asiatic Countries including Pakistan, Bangladesh, India and Sri Lanka. A sample of 30 old ages rates of Inflation and Unemployment have been taken for all of the four states, from the twelvemonth 1981 to 2010, and Linear Regression Model has been applied to the penal information. It has been evidenced that on sum there is no important relationship between Unemployment and Inflation ; nevertheless the separate analysis for each state shows that in Pakistan there is a positive relationship between both the variables and in Bangladesh the rising prices negatively affects the unemployment, i.e. Bangladesh grounds the being of traditional Phillips Curve.

LITERATURE REVIEW

Phillips ( 1958 ) put the visible radiation upon the theory of a sort of trade-off between the rate of rising prices and the rate of unemployment. Phillips describes how he observed an opposite relationship between money pay alterations and unemployment in the British economic system over the period examined. This relationship depicts that the rising prices rate depends insecurely upon the degree of unemployment in an economic system. Similar forms were found in the other states and Phillip ‘s work was farther taken by Samuelson and Solow ( 1960 ) made the expressed nexus between rising prices and unemployment: when rising prices was high, unemployment was low and vice-versa. Fisher ( 1920 ) noted this sort of Phillips curve relationship. However, Phillips ‘ original curve described the behaviour of money rewards. Since the nucleus undertaking of policy-makers of the province is to avoid both high unemployment and runaway rising prices, Phillips Curve leaves the pick with the province to take any one higher and bask the lower of other. If we are willing to digest high degrees of unemployment, at the same time we can bask the low rates of monetary value rising prices and frailty versa. ( For illustration, to cut down rising prices X per centum would necessitate the loss of Y occupations and a alteration of Z per centum in growing ) .

Friedman ( 1970 ) argued that the Phillips curve relationship was merely a short-term phenomenon, as many states experienced high degrees of both rising prices and unemployment in that period. Theories based on the Phillips curve suggested that this could non go on, and the curve came under a conjunct onslaught from a group of economic experts headed by Friedman. He argued that in the long-term workers and employers will take rising prices into history, ensuing in employment contracts that increase wage at rates near awaited rising prices. Employment would so get down to fall until “ full employment ” was reached, but now with higher rising prices rates. This consequence implies that over the longer-run there is no tradeoff between rising prices and employment. This deduction is important for practical grounds because it implies thatA cardinal Bankss should non put employment marks above the natural rate.

Brayton, Roberts and Williams ( 1999 ) studied the dependence of monetary value rising prices on the unemployment rate, past monetary value rising prices, and standard steps of monetary value supply dazes, to place the factors behind coincident happening of low falling monetary value rising prices and low unemployment in US in that period. The writers took six steps of rising prices ( including CPI Consumer monetary value index, all points, CPIX Consumer monetary value index, excepting nutrient and energy chain-weight monetary value, PCE Personal ingestion expenditures chain-weight monetary value, PCEX Personal ingestion outgos, excepting nutrient and energy, GDP chain-weight monetary value, NFB Nonfarm concern, excepting lodging, chain-weight monetary value ) and put two alternate alterations to the belongingss of Standard Phillips Curve by first replacing unemployment with capacity use and secondly with markup of monetary values over tendency unit labour costs. Writers concluded that Capacity Utilization predicted rising prices more accurately than did the unemployment rate, and besides the grade up of monetary values in portion explained the rising prices motion of that decennary. This article can be relevant to our work of research as we could analyze these variables on the informations acquired from our four selected economic systems.

Another survey sing “ Why there is a long tally trade-off between rising prices and unemployment and how does it depend on the grade to which wage-price determinations are backward versus frontward looking ” was conducted by Snower and Karanassou ( 2002 ) the writers wanted to place the impact of price-wage determinations of the different clip orientations ( i.e. : past rewards and monetary values, and future rewards and monetary values ) on the form of the long tally Phillips Curve. The writers specify three facets in this respect the backward looking, the forward looking and the wage-price contracts and stress their analysis on the ulterior facet. They farther remark that when economic agents, confronting time-contingent, staggered nominal contracts, have a positive rate of clip penchant, the current pay and monetary value degrees depend more to a great extent on past rewards and monetary values than those of the hereafter. Consequently the long tally Phillips Curve becomes downward inclining. The theoretical account used in this survey has three edifice blocks. The first block links unemployment to the existent money balances, the 2nd specifies the money supply and the 3rd specifies the response of the pay and monetary value degree to the money supply. The writers concluded that when the clip price reduction rate is positive, the backward looking determiners of pay formation have strong influence than the forward looking 1s. Therefore an addition in the money growing raises rising prices rate and reduces the unemployment rate in the long tally. Hence the long tally Phillips Curve is downward inclining. This work relates to our survey as we would place long tally relationship between rising prices and unemployment in south Asiatic states.

Another work was done as a new expression at the long tally kineticss of rising prices and unemployment in response to lasting alterations in the growing rate of the money supply.

Snower, Sala and Karanassou ( 2002 ) examine the Phillips Curve from the position of what they call “ Frictional Growth ” ( i.e. the interaction between money growing and nominal clashs ) . After showing theoretical theoretical accounts of this phenomenon, they constructed an empirical theoretical account of the Spanish economic system to place the interplay between money growing and prolonged nominal accommodation procedures. In this context the writers evaluate the long tally inflation-unemployment trade off for Spain and analyze how recent policy alterations have affected it. The analysis rests on three empirical regularities: ( I ) the growing rate of the money supply is nonzero, ( two ) there is some nominal inactiveness, so that a current nominal variable is slow to set to money growing dazes, and ( three ) unemployment is influenced by the ratio of the nominal money supply to that nominal variable ( such as the ratio of the money supply to the monetary value degree ) . The survey was based on three theoretical accounts, the first theoretical account describes the existent money balance channel, ” i.e. an addition in money growing affects long-term existent money balances and thereby the long-term unemployment rate. The 2nd theoretical account considers the existent pay channel, ” whereby an addition in money growing affects long-term unemployment via the existent pay and employment. And the 3rd theoretical account considers both channels runing together.

Writers suggest a important function for pecuniary policy in battling Spanish unemployment in the long tally. This function, nevertheless, has been reduced slightly through consecutive policy alterations, peculiarly the debut of the Monclova Pacts and Spain ‘s entry into the EEC and perchance the EMS. They further conclude that the pecuniary policy has had a really significant and drawn-out consequence on unemployment and the rising prices ; the empirical analysis of Spain ‘s long tally Inflation-unemployment trade-off indicates that some of this unemployment consequence is lasting.

Blanchflower and Oswald ( 1994 ) argue that rewards are determined by a “ pay curve ” that relates an person ‘s pay to the degree of the unemployment rate in their part or industry. They besides suggest that these are macroeconomic consequences and these consequences can be inconsistent with a macroeconomic Phillips curve. In resistance to Phillips, their groundss suggest that there is a relationship between the degree of the pay and the unemployment rate and non the alteration in the pay. King and Watson ( 1994 ) have taken grounds into history and concluded that expectations-augmented Phillips curve is a robust characteristic of the U.S. macroeconomic informations over the past several decennaries and as a effect appears to be some tenseness between single pay curve and macroeconomic consequences, but this tenseness is merely evident tenseness non the existent one.

Empirical grounds suggests that estimations of the incline of the pay curve that are taken from Phillips curves are close to the scope of estimations that Blanchflower and Oswald obtain from microeconomic informations. The aggregative informations may be reflecting the same phenomena as Blanchflower and Oswald are depicting. Many macroeconomic text books, such as Hall and Taylor ( 1993, pp. 597-8 ) nad Dornbusch and Fischer ( 1994 p.472 ) , use the term “ expectations-augmented Phillips curve ” to mention to an sum relationship between rising prices, expected rising prices, and the unemployment rate.

Blanchflower and Oswald besides province that “ The thought of a Phillps curve may be inherently incorrect ” . The cogency of this statement depends on what we mean by the Phillips curve.Their proposition is that Phillips ‘s original theoretical account does non use to an single information. However this proposition is however consistent with macroeconomic expectations-augmented Phillips curve.

Blanchard and Katz ( 1997 ) in his recent paper, argue Blanchflower and Oswald ‘s empirical grounds that it is the degree, instead than the alteration, in the pay that is related to the unemployment at the macroeconomic degree. As Blanchard and Katz point out, if the macroeconomic relationship involves the alteration instead than the degree, it is easy to deduce the macroeconomic Phillips curve.

Aggregate Phillips curve can besides be derived if Blanchflower and Oswald are right ; an deduction is that the signifier of the microeconomic relationship does non count for the derivation of the aggregative Phillips curve.

Methodology

For this research, the historical rates of rising prices and unemployment have been acquired from on-line resources including UNO ‘s official web site and Indexmundi web site. The analysis utilised simple additive arrested development theoretical account ; the trial involved regressing dependent variable Unemployment ( log transformed ) and independent variable Inflation. The undermentioned arrested development was used as a base to demo the relationship of rising prices with unemployment.

RoU = I± + I?iRoI + Iµ

Where,

RoU = the rate of unemployment,

I± = the intercept: value predicted by the theoretical account,

I?i = the coefficient value of the forecaster ;

RoI = the rate of rising prices and

Iµ = the error term.

RESULTS AND DISCUSSIONS

The following table 1 of ANOVA, tests the acceptableness of the theoretical account from a statistical position. The arrested development shows that merely 31.7 % of the fluctuation has been accounted for by the theoretical account, although it ‘s greater than the Residual value nevertheless the F statistic value is undistinguished 0.350. So it can safely be assumed that fluctuation explained by the theoretical account may be due to opportunity.

Table. 1 /2

ANOVAb

Model

Sum of Squares

df

Mean Square

F

Sig.

1

Arrested development

.317

1

.317

.886

.350a

Residual

23.242

65

.358

Entire

23.559

66

a. Forecasters: ( Constant ) , Rate of Inflation

B. Dependent Variable: COMPUTE LN_UEmp=LN ( Unemployment )

Table. 2/2 ANOVAb

Name of the State

Model

Sum of Squares

df

Mean Square

F

Sig.

Pakistan

1

Arrested development

.449

1

.449

2.996

.095a

Residual

3.895

26

.150

Entire

4.344

27

India

1

Arrested development

.024

1

.024

.898

.375a

Residual

.185

7

.026

Entire

.209

8

Bangladesh

1

Arrested development

7.406

1

7.406

8.400

.023a

Residual

6.172

7

.882

Entire

13.578

8

Sri Lanka

1

Arrested development

.102

1

.102

.863

.365a

Residual

2.255

19

.119

Entire

2.357

20

a. Forecasters: ( Constant ) , Rate of Inflation

B. Dependent Variable: COMPUTE LN_UEmp=LN ( Unemployment )

While the ANOVA tabular array is a utile trial of the theoretical account ‘s ability to explicate any fluctuation in the dependant variable, it does non straight address the strength of that relationship.

The theoretical account drumhead tabular array studies the strength of the relationship between the theoretical account and the dependant variable. The table 2 of the Model Summery shows, account by the theoretical account, and 0.116 value of R shows a really hebdomad anticipation of unemployment through rising prices. If we see the R Square 0.013 it shows that merely 1.3 % of the fluctuation is explained by the theoretical account, that is, there is about none or an overall negligible relationship between rising prices and unemployment.

Table.2

Model Summaryb

Model

Roentgen

R Square

Adjusted R Square

Std. Mistake of the Estimate

Durbin-Watson

1

.116a

.013

-.002

.59797

.582

a. Forecasters: ( Constant ) , Rate of Inflation

B. Dependent Variable: COMPUTE LN_UEmp=LN ( Unemployment )

To see the comparative comparing of the relationship between Inflation and Unemployment in all four states we follow the below given coefficients table 3. In this tabular array we see that three of the four states ‘ ( Pakistan, India and Sri Lanka ) coefficients are non-significant bespeaking the rising prices rate does non see much to the theoretical account However Bangladesh is important forecaster. On placing the comparative importance we see that Bangladesh has a really much negative absolute standardized coefficient -0.739, which shows a well negative relationship between Inflation and Unemployment, and it clearly depicts from the Unstandardized beta -0.527. This negative value is the pure probe of Phillips Curve.

Table. 3 Coefficientsa

Name of the State

Model

Unstandardized Coefficients

Standardized Coefficients

T

Sig.

Bacillus

Std. Mistake

Beta

Pakistan

1

( Constant )

1.477

.167

8.825

.000

Rate of Inflation

.032

.019

.321

1.731

.095

India

1

( Constant )

2.060

.128

16.139

.000

Rate of Inflation

.016

.017

.337

.948

.375

Bangladesh

1

( Constant )

5.562

1.271

4.377

.003

Rate of Inflation

-.527

.182

-.739

-2.898

.023

Sri Lanka

1

( Constant )

2.048

.188

10.895

.000

Rate of Inflation

.015

.016

.208

.929

.365

a. Dependent Variable: COMPUTE LN_UEmp=LN ( Unemployment )

Decision

In the visible radiation of above consequences and our analysis we found that although there is no being of Phillips Curve in aggregative South Asiatic economic systems. However in comparative analysis we come to cognize that there is a little positive relationship between rising prices and unemployment in Pakistan, ( which is the rearward instance of the Phillips Curve ) , and a important negative relationship in Bangladesh. So Bangladesh entirely witnesses the being of Phillips Curve. Logically an addition in rising prices rate should besides trip up the unemployment rate which is go oning in Pakistan, but in instance of Bangladesh the state of affairs is rearward that is when rising prices is increasing it cuts down the rate of unemployment. This state of affairs can be the consequence of migration of the locals for occupation keeping, and people may get down supplementing their income beginnings to do a trade-off between their current disbursement and future demand.

REFRENCES

Phillips ( 1958 ) , The Relationship between Unemployment and the Rate of Change of Money Wages in the United Kingdom, 1861-1957: “ Economica 57 ” ( 1958 ) , pp.283-99

John M. Roberts ( 1997 ) , The Wage Curve and Phillips Curve, Federal Reserve Board FEDS Paper No 97-57, JEL Classification E31, J22, J41

Dennis J. Snower, Marika Karanassou ( 2002 ) , “ An Anatomy of the Phillips Curve ” Discussions Paper No. 365, IZA Germany, JEL Classification E2, E3, E5, J3.

Flint Brayton, John M. Roberts, and John C. Williams, ( 1999 ) , Federal Reserve System U.S ( Finance and Economics Discussion Series ) ( 1999-49 )

Marika Karanassou, Hector Sala, Dennis J. Snower, ( 2002 ) , “ Long-run Inflation-Unemployment Dynamicss: The Spanish Phillips Curve and Economic Policy ” IZA Germany Discussion Paper No. 645, JEL Classification E2, E3, E4, E5, J3.

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