Title : Revisiting the Phillips Curve and the Lucas Critique

Authors : Md. Sharif Hossain and Rajarshi Mitra

Abstract : Many OECD countries are facing problems of high government debt and high unemployment. Consequently, a monetary stimulus is being increasingly viewed as a solution to curb the rising debt burden and stimulate economic growth. Some OECD countries are setting inflation target at 2% or even higher. In this paper we investigate the likely impact of inflation on unemployment for a panel of 10 high-income OECD countries, namely, Australia, Denmark, Iceland, Japan, Korea, New Zealand, Norway, Sweden, Switzerland and the United States. The period of study is 1970-2012. Results indicate a significantly positive long-run impact of inflation on unemployment. Granger causality indicates long-run bi-directional causality between inflation and unemployment. For the 10 OECD countries and the period of this study, the empirical findings support the Lucas critique: inflation and unemployment are positively correlated. A monetary stimulus, therefore, will most likely aggravate the unemployment scenario in the 10 OCED countries under study.

Journal : Journal of Economics and Behavioral Studies, Vol. 5, No. 4, 221-225. Volume : 5 Year : April 2013 Issue : 4
Pages : 221-225 City : Edition : Editors :
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