DOES PHILLIPS CURVE REALLY EXIST? AN EMPIRICAL EVIDENCE FROM JORDAN

Abstract

This study empirically examined the relationship between inflation rate and unemployment rate in order to predict and estimate the existence of Philips curve trade-off relationship within Jordanian economy over the period of 1976 to 2013. It employs multiple descriptive and econometrics approaches using unit root tests, co-integration tests, VECM, and linear and non-linear ordinary least square regression tests. In the findings of this study, there was a negative and non-linear relationship between unemployment and inflation. The lowest limits of inflation and unemployment were estimated to be 3.779% and 11.077% respectively. The elasticity of inflation with respect to unemployment, and the elasticity of unemployment with respect to inflation were estimated to be -0.23% and- 0.02% respectively. Therefore, this study provides a strong empirical existence of Phillips Curve on Jordanian economy over the period of 1976- 2013. However, this trade-off implies that policymakers can target low unemployment or low inflation, but not both. As a result, policy makers should pay attention to this kind of relationship between these two important economic variables in applying fiscal and monetary policies in reducing any of these two variables.