Is It So Early to Discard Phillips Curve as a Policy Guide? Insights from Bangladesh

Abstract

The famous economic idea that describes the inverse relationship between inflation and unemployment is Phillips curve. The usual trade-off relationship that inflation shares with unemployment has recently become questionable as the behavior of the Phillips curve across different economies appears to be baffling. This has made the relevance of including Phillips curve as a policy guide quite doubtful. Against this backdrop, the study attempts to examine the existence of Phillips curve in Bangladesh. Employing autoregressive distributed lag (ARDL) bound testing approach to cointegration, the study has observed that Phillips curve is indeed existent in Bangladesh with its usual trade-off relationship. The findings on Phillips curve are robust as the curve has been observed to be existent in different sampling period using the same theoretical and econometric arrangement. The findings bear a good deal of weight to the central bank in Bangladesh as, sooner or later, it may have to adopt inflation-targeting monetary approach to rein in the inflation persistence in the country.

Keywords: inflation, unemployment, Phillips curve, NAIRU, ARDL, bound testing, Bangladesh

DOI: 10.7176/DCS/10-4-05

Publication date: April 30^th 2020