JEFMS Journal

ABSTRACT:

Levels of unemployment is of great concern to policy makers in most world economies. Many models have been developed to address the problem but no clear solution has been found. Closely related to unemployment is the problem of inflation. Stagflation, a condition where both unemployment and inflation are high at the same time has resulted to ineffectiveness of policies issued by monetary authorities in Kenya. Solutions to unemployment and inflation are challenges experienced by policy makers in many economies. The purpose of this study was to empirically analyze the validity of Philips curve in the Kenyan economy. The study was informed by the ever increasing unemployment rates, cost of living and the inadequate attention inform of policies made by the policy makers to alleviate the economy from this problem. The study adopted an explanatory research design and employed an Auto-Regressive Distributed Lag (ARDL) and Error Correction Model (ECM) to analyze both the short run and the long run results. The study sample entailed of annual secondary time series data set for a period of 30 years from 1991 to 2020, sourced from KNBS, Central Bank of Kenya, and World Bank. The findings of the study concluded that the relationship between unemployment and inflation was positive and insignificant both in the short run and in the long run. The Non-Accelerating Inflation Rate of Unemployment (NAIRU) was estimated to be 6.26 percent but insignificant. The findings of the study also showed that money supply and government expenditure had a negative and positive but insignificant relationship with unemployment in the short run. The study recommends that the government should not employ Phillips curve as an instrument for policy implementation in Kenya. This is because both unemployment and inflation are positively related. Finally, the government should come up with a supplementary policy of cushioning the economy against the harsh effects of structural breaks on unemployment in the economy.

KEYWORDS:

Unemployment, Inflation, NAIRU, Stagflation.

REFERENCES:

1) Aborisade, O. P. (2013). Data collection and new technology. International Journal of Emerging Technologies in Learning (iJET), 8(2), 48-52.

2) Abu, N. (2019). Inflation and Unemployment Trade-off: A Re-examination of the Phillips Curve and its Stability in Nigeria. Contemporary economics, 13(1), 21-35.

3) Akerlof, G. A. (2003). Behavioral macroeconomics and macroeconomic behavior. The American Economist, 47(1), 25-47.

4) Ascari, G., Bonomolo, P., & Haque, Q. (2022). The Long-Run Phillips Curve is... a Curve.

5) Bachmann, R., Berg, T. O., & Sims, E. R. (2015). Inflation expectations and readiness to spend: Cross-sectional evidence. American Economic Journal: Economic Policy, 7(1), 1-35.

6) Ball, L., & Mankiw, N. G. (2002). The NAIRU in theory and practice. Journal of economic Perspectives, 16(4), 115-136.

7) Beaudry, P., Hou, C., & Portier, F. (2020). Monetary Policy when the Phillips Curve is Locally Quite Flat.

8) Blanchard, O. (2016). The Phillips Curve: Back to the'60s? American Economic Review, 106(5), 31-34.

9) Breusch, T. S., & Pagan, A. R. (1979). A simple test for heteroscedasticity and random coefficient variation. Econometrica: Journal of the econometric society, 1287-1294.

10) Byrne, D., & Strobl, E. (2009). Defining unemployment in developing countries: The case of Trinidad and Tobago Centre for Research in Economic Development and International Trade.

11) Brunner, K., & Meltzer, A. (1983). Econometric policy evaluation: A critique. In Theory, Policy, Institutions: Papers from the Carnegie-Rochester Conferences on Public Policy (Vol. 1, p. 257). North Holland.

12) Bruno, M., & Sachs, J. D. (2013). Economics of worldwide stagflation. Harvard University Press.

13) Bullard, J. (2018, June). The case of the disappearing Phillips curve. In Speech delivered at the 2018 ECB Forum on Central Banking, Sintra, Portugal, June (Vol. 19).

14) Chatelain, J. B., & Ralf, K. (2020). How macroeconomists lost control of stabilization policy: towards dark ages. The European Journal of the History of Economic Thought, 27(6), 938-982.

15) Ciccarelli, M., & Mojon, B. (2010). Global inflation. The Review of Economics and Statistics, 92(3), 524-535.

16) Chetty, R. (2015). Behavioral economics and public policy: A pragmatic perspective. American Economic Review, 105(5), 1-33.

17) Chicheke, A. (2009). Monetary policy, inflation, unemployment and the Phillips curve in South Africa (Doctoral dissertation, University of Fort Hare).

18) Cipra, T. (2020). Autocorrelation Methods in Regression Models. In Time Series in Economics and Finance (pp. 175-195). Springer, Cham.

19) Coibion, O., Gorodnichenko, Y., Kumar, S., & Pedemonte, M. (2020). Inflation expectations as a policy tool? Journal of International Economics, 124, 103297.

20) Couture, C. A. (2021). Essays on Central Bank Projections, Credibility, and Monetary Policy (Doctoral dissertation, University of California, Irvine).

21) Dorn, J. A. (2020). Maintaining Distance between Monetary and Fiscal Policy. Cato Institute, November, 18.

22) Dritsaki, C., & Dritsaki, M. (2013). Phillips curve inflation and unemployment: an empirical research for Greece. International Journal of Computational Economics and Econometrics, 3(1-2), 27-42.

23) Dur, A., & García, E. M. (2020). Mind the gap! —A monetarist view of the open-economy Phillips curve. Journal of Economic Dynamics and Control, 117, 103959.

24) Eatwell, J., Milgate, M., & Newman, P. K. (Eds.). (1991). The World of Economics: The New Palgrave. WW Norton.

25) Eje, G. C. (2018). Effectiveness of Stabilization Policies in Nigeria under the Phillips Curve Framework. European Journal of Social Sciences Studies.

26) E Bildirici, M., & Ozaksoy Sonustun, F. (2018). Backward bending structure of Phillips Curve in Japan, France, Turkey and the USA. Economic research-Ekonomska istraživanja, 31(1), 537-549.

27) El Alaoui, A., Ezzahidi, E., & Eladnani, M. J. (2013). Estimating NAIRU: The Morocco case.

28) Estrella, Arturo, & Mishkin, Frederic S. (1999). Rethinking the role of NAIRU in monetary policy: implications of model formulation and uncertainty. In Monetary Policy Rules (pp. 405-436): University of Chicago Press.

29) Fischer, S., & Capie, F. (1994). Modern central banking. Stanley Fischer, IMF Essays from a Time of Crisis: The International Financial System, Stabiliza—tion, and Development (Cambridge, MA: MIT Press, 2005), 169-222.

30) Fischer, S. (1977). Long-term contracts, rational expectations, and the optimal money supply rule. Journal of political economy, 85(1), 191-205.

31) Friedman, M. (1995). The role of monetary policy. In Essential Readings in Economics (pp. 215-231). Palgrave, London.

32) Fomenko, M. (2020). Youth unemployment and ways of tackling it. In Sesiune națională cu participare internațională de comunicări științifice studențești, (pp. 51-53).

33) Furuoka, F. (2007). Does the “Phillips curve” really exist? New empirical evidence from Malaysia. Economics Bulletin, 5(16), 1-14.

34) Galbraith, J. K. (1997). Time to Ditch the NAIRU. Journal of Economic Perspectives, 11(1), 93-108.

35) Godfrey, L. G. (1978). Testing for higher order serial correlation in regression equations when the regressors include lagged dependent variables. Econometrica: Journal of the Econometric Society, 1303-1310.

36) Gokmen, S., Dagalp, R., & Kilickaplan, S. (2020). Multicollinearity in measurement error models. Communications in Statistics-Theory and Methods, 1-12.

37) González-Estrada, E., & Cosmes, W. (2019). Shapiro–Wilk test for skew normal distributions based on data transformations. Journal of Statistical Computation and Simulation, 89(17), 3258-3272.

38) Gordon, R. J. (1997). The time-varying NAIRU and its implications for economic policy. Journal of economic Perspectives, 11(1), 11-32.

39) Granger, C. W. (1980). Testing for causality: A personal viewpoint. Journal of Economic Dynamics and control, 2, 329-352.

40) Haldane, A., & Quah, D. (1999). UK Phillips curves and monetary policy. Journal of Monetary Economics, 44(2), 259-278.

41) Hagemann, H. (2020). Inflation Expectations and the Phillips Curve: Then and Now. In Expectations (pp. 131-144). Springer, Cham.

42) Hall, R. E., & Sargent, T. J. (2018). Short-run and long-run effects of Milton Friedman's presidential address. Journal of Economic Perspectives, 32(1), 121-34.

43) Heise, S., Karahan, F., & Şahin, A. (2020). The Missing Inflation Puzzle: The Role of the Wage-Price Pass-Through (No. w27663). National Bureau of Economic Research.

44) Johansen, S. (1995). A stastistical analysis of cointegration for I (2) variables. Econometric Theory, 11(1), 25-59.

45) Kivunja, C., & Kuyini, A. B. (2017). Understanding and applying research paradigms in educational contexts. International Journal of higher education, 6(5), 26-41.

46) Liew, V. K. S. (2004). Which lag length selection criteria should we employ?. Economics bulletin, 3(33), 1-9.

47) Lindé, J., & Trabandt, M. (2019). Resolving the missing deflation and inflation puzzles. VOX EU.

48) Lipsa, R. (2018). Inflation and monetary policy in India: Some empirical relations. International Journal of Advances in Agriculture Sciences.

49) Lipsey, R. G. (1960). The relation between unemployment and the rate of change of money wage rates in the United Kingdom, 1862-1957: a further analysis. Economica, 1-31.

50) Lubik, T. A., & Surico, P. (2010). The Lucas critique and the stability of empirical models. Journal of Applied Econometrics, 25(1), 177-194.

51) Lucas Jr, R. E., & Rapping, L. A. (1969). Real wages, employment, and inflation. Journal of political economy, 77(5), 721-754.

52) Mankiw, N. G. (2001). The inexorable and mysterious tradeoff between inflation and unemployment. The Economic Journal, 111(471), 45-61.

53) Masese, G. N. (2017). The Short And Long Run Philips Curve With The Lucas Critique In Kenya.

54) Moos, K. A. (2019). The facts and the values of the Lucas critique. Review of Political Economy, 31(1), 1-25.

55) Murphy, A. (2018). The Death of the Phillips Curve?.

56) Mushtaq, R. (2011). Augmented dickey fuller test.

57) Muth, J. F. (1961). Rational expectations and the theory of price movements. Econometrica: Journal of the Econometric Society, 315-335.

58) Obabire Akinleye, A., Agboola, J. O., Ajao Isaac, O., & Adegbilero-Iwari Oluwaseun, E. Comparison of different tests for detecting heteroscedasticity in datasets.

59) Palachy, S. (2019). Detecting stationarity in time series data. Medium Towards Data Sci, 9, 53.

60) Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of applied econometrics, 16(3), 289-326.

61) Phelps, E. S. (1968). Money-wage dynamics and labor-market equilibrium. Journal of political economy, 76(4, Part 2), 678-711.

62) Phillips, A. W. (1958). The relation between unemployment and the rate of change of money wage rates in the United Kingdom, 1861-1957. economica, 25(100), 283-299.

63) Reichel, R. (2004). On the death of the Phillips curve: further evidence. Cato J., 24, 341.

64) Romer, D. (2018). Advanced macroeconomics. Mcgraw-hill.

65) Sargent, T. J. (2018). The conquest of American inflation. Princeton University Press.

66) Samuelson, P. A., & Solow, R. M. (1960). Analytical aspects of anti-inflation policy. The American Economic Review, 50(2), 177-194.

67) Shapiro, S. S., & Wilk, M. B. (1965). An analysis of variance test for normality (complete samples). Biometrika, 52(3/4), 591-611.

68) Sköld, E., & Tesfay, K. (2020). The relationship between inflation and unemployment in Sweden.

69) Solow, R. M., Taylor, J. B., & Taylor, J. B. (1999). Inflation, unemployment, and monetary policy. MIT press.

70) Soylu, Ö. B., Çakmak, İ., & Okur, F. (2018). Economic growth and unemployment issue: Panel data analysis in Eastern European Countries.

71) Stirati, A., & Meloni, W. P. (2018). A short story of the Phillips curve: from Phillips to Friedman… and back?. Review of Keynesian Economics, 6(4), 493-516.

72) Studenmund, A. H. (2014). Using econometrics a practical guide. Pearson.

73) Tobin, J., Parrinello, S., & Labini, P. S. (1999). Supply constraints on employment and output: NAIRU versus natural rate. In Economic Theory and Social Justice (pp. 35-62). Palgrave Macmillan, London.

74) Vermeulen, J. C. (2017). Inflation and unemployment in South Africa: Is the Phillips curve still dead? Southern African Business Review, 21(1), 20-54.

75) Wheeler, D. (2017). Is There a Phillips Curve? In Unemployment and Inflation (pp. 46-58). Routledge.