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The Business Cycle, Inflation, and Unemployment Rate Nexus: An Empirical Approach
Author(s) -
Tito Belchior Silva Moreira,
Michel Constantino,
George Henrique de Moura Cunha,
Paulo Roberto Pires de Sousa,
Luciano Balbino dos Santos
Publication year - 2021
Publication title -
international journal of economics and finance
Language(s) - English
Resource type - Journals
eISSN - 1916-9728
pISSN - 1916-971X
DOI - 10.5539/ijef.v13n10p110
Subject(s) - economics , phillips curve , business cycle , misery index , inflation (cosmology) , unemployment , monetary policy , causality (physics) , nexus (standard) , granger causality , context (archaeology) , econometrics , variance (accounting) , macroeconomics , real interest rate , full employment , keynesian economics , monetary economics , paleontology , physics , accounting , quantum mechanics , biology , theoretical physics , computer science , embedded system
This paper revisits the main assumption regarding the original Phillips curve regarding the American economy, in which one assumes that the unemployment rate causes an inflation rate. In this context, this paper aims to evaluate if the variance of the inflation rate affects the unemployment rate and, besides, if there is a one-way causality from the variance of the inflation rate to the unemployment rate. Based on quarterly time series from 1959:04 to 2019:04 the empirical results show, via OLS and GMM methods, that the monetary policy affects the business cycle, and, in turn, the business cycle impacts the unemployment rate. Hence, the monetary policy affects indirectly the unemployment rate via the business cycle. On the other hand, the variance of the inflation rate contributes to an increase in the unemployment rate, consequently, there isn’t a trade-off between the unemployment rate and the variance of the inflation rate. Moreover, there is a one-way causality from the variance of the inflation rate to the unemployment rate. This is the contribution of this paper. At last, based on the Phillips curve, one expects that the unemployment rate causes the inflation rate. However, the Granger causality tests display a two-way causality relation between both variables.

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