Does the Phillips Curve Really Exist? A Multi-Countries Analysis of Financial Policies and Shocks

Document Type : Research Paper

Author

Assistant Professor in Economics, Institute for Humanities and Cultural Studies

10.30465/jnet.2024.46802.2080

Abstract

The critical question is, if the Phillips Curve really exists, how have economies with simultaneously low and stable unemployment and inflation rates become ever-increasingly a global experience? This research claims that financial development can prevent the formation of any inflation-unemployment trade-off. The financial development multilateral index is calculated by combining banking sector and stock market indicators using Principal Components Analysis and Credit Weights. Findings from the estimation of “Rolling Auto-Regressive Distributed Lags” (RARDL) for countries with different levels of financial development and financial structures from 1979Q1 to 2016Q4 are in support of policymaking for “balanced development of financial infrastructures in the framework of a well-balanced financial structure” for economies that want to target low inflation and unemployment simultaneously. Finally, the findings of this research show that the trade-off between inflation and unemployment is, in its nature, a policy relationship, not a behavioral one. While there is an “apparently” stable trade-off between inflation and unemployment by using the demand-side policies (and the resulting demand-pulled inflation), by using supply-side policies (and the resulting cost-pushed inflation) there will be no trade-off, so from a political point of view, exit from stagflation become possible.

Keywords

References

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History

  • Receive Date: 18 September 2023
  • Revise Date: 01 June 2024
  • Accept Date: 29 May 2024

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