Quest for a Valid Phillips Curve in the Long Run: An Empirical Approach

This paper examines the relationship between inflation rate (percentage change in consumer price index) and unemployment rate (number of unemployed persons as a percentage of the labor force) by using modern econometric approach to find a “Phillips Curve”. Using US data of both monthly and yearly frequency, the paper finds the existence of a long-run trade-off between inflation and unemployment. A linear form of the Phillips curve is estimated for the USA using ordinary least squares estimation (OLS). The co integration test shows the long run relation between the variables. This contradicts the theory that in long run the Phillips curve should be vertical. Some of the findings can be summarized as follows: (a) the Phillips Curve fits the data well; (b) inflation of previous year influences the present rate of inflation and (c) both monthly data and yearly data support the existence of Phillips curve in the long run