Inflation, Unemployment and the NAIRU in Pakistan ( )

Transcription

1 Inernaional Journal of Economics and Finance Vol. 3, No. ; February 20 Inflaion, Unemploymen and he NAIRU in Pakisan ( ) Khalid Zaman Assisan Professor, Deparmen of Managemen Sciences COMSATS Insiue of Informaion Technology, Abboabad, Pakisan Tel: ; Fax: khalidzaman@cii.ne.pk Muhammad Mushaq Khan Head of Deparmen (HOD), Managemen Sciences COMSATS Insiue of Informaion Technology, Abboabad, Pakisan Tel: ; Fax: khanmm@cii.ne.pk Mehboob Ahmad Professor of Managemen Sciences, FUIEMS, Foundaion Universiy New Lalazar, Rawalpindi Can, Pakisan Tel: ; Fax: mmehboobahmad@gmail.com Waseem Ikram Assisan Professor, Managemen Sciences COMSATS Insiue of Informaion Technology, Abboabad, Pakisan Tel: ; Fax: drwaseem@cii.ne.pk Absrac In a developing counry like Pakisan, Phillips Curve approach is employed on a daa se of 35 years saring from Phillips Curve helps in examining he relaionship beween inflaion and unemploymen. There is a non-proporional negaive relaionship beween inflaion and unemploymen (if unemploymen is reduced han here is a rising price level in he economy). Non-parameric esimaes of he NAIRU are calculaed. In his sudy, resuls are in he range of percen. There is a long-run and casual relaionship beween inflaion and unemploymen over he above menioned period in Pakisan. There is a ransiory relaionship (shocks) in he shor-run, while here is a permanen relaionship (shocks) in he long-run. By looking a he relaionship esablished, one can forecas for nex 0 years, ha here will be an opposie relaionship beween boh variables. This paper documens an empirical evidence for he exisence of he Phillips curve in Pakisan i.e., inflaion has decreased unemploymen. Keywords: Phillips curve, NAIRU, Granger causaliy, Impulse response funcion, Pakisan Jel Classificaion Code: C22, E3, E50. Inroducion Over he las five decades, he subjec of price/wage inflaion and unemploymen has been a major concern for economiss and common economic agens. This approach sared in 958, when a Briish Economis A. W. Phillips wroe an aricle on The Relaionship beween Unemploymen and he Rae of Change of Money Wage Raes in he Unied Kingdom by using a daa se from 862 o 957. This empirical sudy was formed by a reasonably smooh curve which is known as Phillips Curve. Phillips curve shows a rade-off beween rae of inflaion and unemploymen. Phillips Curve inerpres ha if unemploymen is o be reduced han we have o accep he rising price level in he economy. Various heories have been pu forward o explain coninuing inflaion all over he world. In Pakisan, he subjec of inflaion has been he cenral issue in mos of macroeconomics sudies. Various facors are considered in he lieraure as srong forces for deermining price inflaion. These facors are moneary expansion, sagnaion of oupu, increasing impor prices, increasing wage raes and sicky expecaions ec... Research Hypohesis I has been observed ha Inflaion and unemploymen have boh direc and indirec relaionships. Our hypohesis is o examine he exisence of Phillips curve by considering, wheher here is a direc or indirec relaionship beween inflaion and unemploymen in he conex of Pakisan..2. Research Objecives The objecive of his paper is o examine he exisence of Phillips Curve in Pakisan, by using a ime series daa from The more specific objecives are: i. To esimae a shor-run rade-off beween inflaion and unemploymen, his is implied by he Phillips Curve and he NAIRU. ii. To esimae a long-run relaionship beween inflaion and unemploymen over he las 35 years. iii. To esimae changes in he unemploymen rae, his is Granger cause changes in inflaion. Published by Canadian Cener of Science and Educaion 245

2 Inernaional Journal of Economics and Finance Vol. 3, No. ; February 20 iv. To esimae permanen supply shocks, his drives boh inflaion and unemploymen in he long-run. Whereas, in he shor run he usual radeoff is induced due o demand shocks. This paper is organized in five secions. Secion 2 presened a lieraure review. Secion 3 focuses on inflaion, unemploymen, NAIRU and unemploymen gap in Pakisan. Secion 4 provides daa source and mehodological framework. The empirical resuls are presened in Secion 5, while he final secion concludes he sudy. 2. Lieraure Review Paul Samuelson and Rober Solow were among he firs researchers, who suppored he Phillips hypohesis. Samuelson and Solow (970) examined he relaionship beween he inflaion and unemploymen rae in he Unied Saes. An inverse relaionship was esablished beween inflaion and unemploymen. In anoher sudy conduced by Solow (970) and Gordon (97), resuls reveal he exisence of a negaive rade-off relaionship beween unemploymen and inflaion using U.S. macroeconomic daa. These empirical findings have been known as he Solow-Gordon affirmaion of he Phillips curve. Alhough William Phillips based his hypohesis on a srong heoreical foundaion, he debae on wheher he Phillips curve really exiss or does no exis daes back o he 960s. Islam e al. (2003: 07) has noed ha Phillips Curve is open o debaes since is incepion. Friedman (968) and Phelps (967) openly criicized he hypohesis and menioned ha here is no rade-off relaionship beween unemploymen and inflaion. Furhermore, Lucas (976) srongly opposed he proposiion of he exisence of he Phillips curve. He argued ha here could have been a rade-off relaionship beween unemploymen and inflaion, subjec o he assumpion ha he policy makers have no creaed an arificial siuaion, where high-inflaion is pared wih low unemploymen. Oherwise, he workers would foresee he high inflaion in he fuure and would demand wage increase from heir employers. In his case, here could be coexisence of high unemploymen and high inflaion rae which is known as he Lucas criique. In he 970s, economiss began o loose ineres in doing research on he Phillips curve. As Debelle and Vickery (998:384) commened, The Phillips curve fell ino a period of neglec in academic circles during he 980s, however i remained an imporan ool for policy makers. 990s winessed he revival of he academic ineres in he Phillips curve and he Phillips curve has again been he subjec of inensive debae (for example, he symposium proceedings in he Journal of Economic Perspecives (Debelle and Vickery, 998:384). Generally, empirical findings have shown he mixed resuls. Some researcher found he significan rade-off relaionship beween unemploymen rae and inflaion raes and oher does no. Among research sudies done in he 990s, Alogoskoufis and Smih (99) showed he empirical evidence o suppor he Lucas criique which denied he exisence of rade-off relaionship. By conras, King and Wason (994) esed he exisence of he Phillips curve using he U.S. pos-war macroeconomic daa. Their findings provided empirical suppor o he exisence of he rade-off relaionship beween unemploymen and inflaion in he USA over he researched period. Hansen and Pancs (200) examined he exisence of he Phillips curve in Laiva. They also found ou ha here is a significan correlaion beween he unemploymen rae and he acual inflaion raes. Furhermore, Islam e al. (2003) examined he hypohesis of Philips curve hrough US economic daa from 950 o 999. They find ou he weak long-run coinegraing relaionship and long-run causaliy beween unemploymen and inflaions. On he oher hand, Har (2003) esed he Phillips hypohesis by employing he hourly wage earning. He concluded ha during iner-war period (926-66) in Briain, he Phillips curve is no suppored by our daa. Furuoka (2007) examined he long-run & rade-off relaionship and also causal relaionship beween he unemploymen rae and he inflaion rae in Malaysia during he period of ). A recen mehodological innovaion in assessing he Phillips curve has been he use of panel daa analysis. Dinardo and Moore (999) used panel daa analysis o examine 9 member counries of he Organizaion for Economic Co-operaion and Developmen (OECD). The researchers used he mehod of Ordinary Leas Squares (OLS) and Generalized Leas Squares (GLS). Their findings confirmed he exisence of he common Phillips curve in hese OECD counries. Turner and Seghezza (999) also employed he panel daa mehod and observed he Phillips curve in 2 OECD counries over he period from he early 970s o 997. To analyze he pooled daa, Turner and Seghezza used he mehod of Seemingly Un-relaed Esimaion (SURE) raher han he OLS. The researchers concluded ha he overall resul provided a srong suppor for he exisence of he common Phillips curve among he 2 chosen member counries of OECD. Arraibel e al. (2002) analyzed New Keynesian Phillips curve wih forward-looking expecaions by using panel daa. They found ha he unemploymen raes have significan relaionship wih non-radable inflaion raes. By conras, Masso and Saehr (2005) used he dynamic panel daa mehod and failed o idenify a significan relaionship beween unemploymen rae and inflaion raes. Research on he Phillips Curve in Pakisan is very limied. Hasan (990) suppored he exisence of a shor-run Phillips Curve for Pakisan for he period 972(Qr.) o 98(Qr.4). Malik and Tashfeen (2007) observed a negaive relaionship beween inflaion and one period lagged unemploymen. Sai e al (2007) find ha fuure inflaionary expecaions play significan role in inflaion deerminaion. A dynamic correlaions beween inflaion and real marginal cos have been observed i.e., inflaion co-moves posiively wih real marginal cos, boh a leads and lags. 246 ISSN 96-97X E-ISSN

3 Inernaional Journal of Economics and Finance Vol. 3, No. ; February 20 Numerous sudies on he Phillips curve are available on developed naions; here is huge scope for sysemaic empirical analysis ha esifies he hypohesis in he conex of a developing counry. Considering imporan economic and poliical implicaions of Pakisan, he Phillips Curve hypohesis enails relaionship beween unemploymen rae and inflaion rae. This paper analyzes he rade-off beween inflaion and unemploymen in Pakisan using secondary daa from 975 o Following dimensions and facors of he Phillips curve hypohesis are focused. NAIRU: NAIRU is an acronym for Non-Acceleraing Inflaion Rae of Unemploymen. The idea behind he naural rae hypohesis was pu forward by Milon Friedman in 968 and i refers o a level of unemploymen, below which inflaion rises. If U* is he NAIRU and U is he acual unemploymen rae, he heory says ha: if U < U* for a few years, inflaionary expecaions rise, so ha he inflaion rae ends o accelerae; if U > U* for a few years, inflaionary expecaions fall, so ha he inflaion rae ends o fall (here is disinflaion); and if U = U*, he inflaion rae ends o be saionary, unless exogenous shock is observed. Naural Rae of Unemploymen: I is he unemploymen, which occurs when he labour marke is in he equilibrium (supply side of unemploymen i.e., fricional and srucural unemploymen). If unemploymen is reduced below he naural rae, here is an increased risk of inflaion. Unemploymen Gap: The difference beween he non-acceleraing inflaion rae of unemploymen (NAIRU) and he acual rae of unemploymen is ermed as unemploymen gap. According o Pallis and Kasouli (2003), in he shor-erm, a rade-off do exiss beween price inflaion and unemploymen. If unemploymen falls below he NAIRU, price inflaion will rise unil unemploymen reurns o he NAIRU, a ha ime price inflaion will sabilize a a permanenly higher level. Co-inegraion echnique is used for analysis. In his sudy a sophisicaed economeric echnique wih addiional ess of forecasing framework is used o examine he effec of changes in inflaion on unemploymen rae over a 0 years period. 3. Brief Overview of Inflaion and Unemploymen Rae in Pakisan 3.. Inflaion Rae The rae of inflaion is an imporan macroeconomic indicaor by which he cenral banks around he world analyze and se heir moneary policy. Pakisan is among hose counries, which are sill experiencing double digi inflaion. There has been an increasing rend of inflaion from 2 percen in 975 o almos 22 percen in Inflaion is documened in he range of 3 percen o 22 percen during he said period (see, Figure ) Unemploymen Rae In 970s, average unemploymen rae was 3.43 percens. I increased by only 0. percen in he year 980s (3.44%). Aferward, average unemploymen rae increased sharply in he year 990s and 2000s, where average unemploymen rae was repored almos 5.56 and 6.97 percen respecively (see Figure 2) Changes in Inflaion (IFR) and Unemploymen Rae (UN) in Pakisan The relaionship beween unemploymen and inflaion rae in Pakisan is an ineresing example. There have been greaer flucuaions in inflaion and unemploymen rae during he years Hence, here has been found an inverse relaionship beween unemploymen rae and inflaion rae. IFR = C + IFR( ) UN u C = (0.046)*; IFR () = (0.000)*; UN = (0.050)* Adjused R-square = 0.4; D.W =.903; F-saisics = (0.000)* Noe: * represen 0.05% significance level Unemploymen Rae (UN) and Unemploymen Gap (UNGAP) in Pakisan Unemploymen Gap is he difference beween he non-acceleraing inflaion rae of unemploymen (NAIRU) and he acual unemploymen rae (UN). NAIRU is esimaed from and observed as 7.8 percen, while average unemploymen rae was 4.9 percen which is less han he NAIRU. I means ha inflaionary expecaions have been raised beween hese years, so high inflaionary ends is observed. Unemploymen gap is observed up o 2.8 percen beween he said periods. Unemploymen and unemploymen gap for he period of are menioned in Figure Daa Sources and Mehodological Framework The sudy uses annual observaions for he period of The daa is obained from Economic Survey of Pakisan ( ), Inernaional Financial Saisics ( ), and World Bank Developmen Indicaors daa ses (WDI-2009). This paper reviews; he impac of he unemploymen on inflaion wihin he conex of Phillips Curve, which is examined in he following manner: Published by Canadian Cener of Science and Educaion 247

4 Inernaional Journal of Economics and Finance Vol. 3, No. ; February 20 By examining wheher a ime series uni roo es is applied; an Augmened Dickey-Fuller (ADF) uni roo es has been used. By finding he long-run relaionship among he variable, coinegraion es has been applied. When he variables are found coinegraed, a Granger causaliy es based on Vecor Error Correcion Mehod (VECM) has been applied o deermine he shor and long-run causaliy. By describing he reacion of endogenous variable i.e., unemploymen a he ime of impulse / shock and over subsequen poins in ime. 4.. Theoreical Mehodology The simple Phillips Curve could be esimaed by using following equaions. If we le we may represen he proporional or percenage change in he wage rae as: If we assume ha w w w be he wage rae in ime, w () w w is proporional o he excess demand for labour d, we may wrie: w d (2) Where is consan. Since he unemploymen rae u is inversely relaed o he excess demand for labor, we could wrie his using our reciprocal funcion as: Given equaion (3), we may hen specify d w a c (3) u w as: a c (4) u Where w is linearly relaed o he non-linear reciprocal variableu. An appropriae linear saisical model may hen be: y 2 Where y ( ) / w w w w x e (5) x and e is a normal random equaion error. u Simply, we can wrie equaions wih he aid of noaion we are using for he variables in our paper, incorporaing naural rae of unemploymen ino he model, he sandard Phillips Curve could be expressed: IFR ( L) IFR ( L)( UR NAIRU ) (6) Where, α (L) and β (L) are polynomials in he lag operaion, NAIRU is naural rae of Unemploymen in Pakisan in he year, and. According o Debelle and Vockery (998), mos of he exising heoreical and empirical lieraures have been based on he equaion 2. The equaion could be modified as: IFR ( L) IFR ( L)( UNGAP ) (7) Where UNGAP is he unemploymen gap (i.e. he acual unemploymen rae minus naural rae of unemploymen rae). To suppor he Phillips curve, we would require negaive and significan coefficiens for he unemploymen gap. The empirical analysis will be based on he equaion Economeric Mehodology The concep of Coinegraion was firs inroduced by Granger (98) and elaboraed furher by Engle & Granger (987), Phillips & Ouliaris (990) and Johansen (99). Engle & Granger Coinegraion es requires ha Time-series, say Y and X, are non-saionary in levels bu saionary in firs differences i.e., Y ~ I () and ~ I (). X 248 ISSN 96-97X E-ISSN

5 Inernaional Journal of Economics and Finance Vol. 3, No. ; February 20 There exiss a linear combinaion beween hese wo series ha is saionary a levels i.e., vi ( Y X ) ~ I(0). Thus, he firs sep for Coinegraion is o es wheher each of hese series are saionary or no. If hey boh are saionary say a firs difference i.e. hey are I(), hen we proceed o he second sep o verify he long run relaionship beween hem. Augmened Dickey Fuller (ADF) es is usually applied o es saionariy. I ess he null hypohesis ha a series Y ) is non-saionary by calculaing a -saisics for 0 in he following equaion: ( Y Y n k 2 Y k k Where k = 2, 3,, n. While,, and are he parameers o be esimaed and is whie noise error erm. If he value of he ADF saisic is less han he criical value a he convenional significance level (usually he 5 % significance level is desirable) han he series ( Y ) is said o be saionary and vice versa. If Y is found o be non-saionary hen i should be deermined wheher Y is saionary a firs differences Y ~ I (0) by repeaing he above procedure. If he firs difference of he series is saionary han he series ( Y ) are inegraed of order one i.e. Y ~ I(). If ime series are I(), han regressions is applied in heir firs difference. However, by aking firs difference, we lose he long-run relaionship ha is sored in he daa. This implies ha one needs o use variables in levels as well. Advanage of he Error Correcion Model (ECM) is ha i incorporaes variables boh in heir levels and firs difference. By doing his, ECM capures he shor-run disequilibrium siuaions as well as he long-run equilibrium adjusmens beween variables. ECM erm having negaive sign and value beween 0 o indicaes convergence of model owards long-run equilibrium and shows how much percenage adjusmen akes place every year. Impulse response funcions race he effecs of a shock o one endogenous variable on o he oher variables in he VAR; variance decomposiion separaes he variaion in an endogenous variable ino he componen shocks o he VAR. Thus, he variance decomposiion provides informaion abou he relaive imporance of each random innovaion in affecing he variables in he VAR. This sudy runs he Granger-causaliy es based on he following he VECM: IFR n n i 2i UNGAP) i 3i( IFR) i 4 ( ECT ) i i ( (8) This paper uses he Granger-causaliy es based on he VECM. There are wo advanages o using his mehod raher han he sandard Granger causaliy es. Firs of all, he Wald es of he independen variables indicaes he shor-run causal effec. Secondly, significan and negaive error correcion erm (ECT) indicaes he long-run causal effecs. 5. Empirical Resuls NAIRU is esimaed for , and wih he values 6.0, 3.2 and 9.0 respecively. NAIRU for overall period i.e., is esimaed as 7.80, which is greaer han average unemploymen rae of 4.99 percen. Resuls reveal ha inflaion was less for he period i.e., and While, here was an increasing rend of inflaion for he period Overall incidence of inflaion for has shown an increasing rend. The cumulaive effec of his rising expeced inflaion rae is posiive, wih unemploymen gap is (-) 2.8 percen over a 35 years period. In he shor-erm, a rade-off exiss such ha if unemploymen rae falls below he NAIRU, inflaion will rise unil unemploymen reurns o he NAIRU. A ha ime inflaion will sabilize a a permanenly higher level (see, Table ). The preliminary sep in his analysis is o esablish he degree of inegraion of each variable. So a es for he exisence of a uni roos in he level and he firs difference of each variable in our sample using he Augmened Dickey Fuller (ADF). The resuls in Table 2 reveal ha boh variables are non-saionary in heir level daa. However, saionariy is found in he firs differencing level of he variables i.e., Inflaion rae (IFR) and unemploymen gap (UNGAP). In he second sage, he Johansen coinegraion es was used o es he long-run movemen of he variables. Engle and Granger (987) have poined ou ha only variables wih he same order of inegraion could be esed for coinegraion. Boh variables were examined for coinegraion a heir firs difference I(). Akaike Informaion Crierion (AIC) was used o deermine opimal lag lengh selecion, while maximum lag lengh is se up o level hree. Table 3 shows ha opimal lag lengh for he Johansen coinegraion es is one (), which minimizes he AIC. Published by Canadian Cener of Science and Educaion 249

6 Inernaional Journal of Economics and Finance Vol. 3, No. ; February 20 Resuls of he coinegraion ess are repored in Table 4 and Table 5 respecively. Saring wih he null hypohesis of no coinegraion among he variables, he race saisics of 9.23 exceeds he 95% criical value of he race saisic (criical value is 5.49). The null hypohesis is valid up o 5% level of confidence. I is concluded ha here is one coinegraion relaionship involving variables i.e., IFR and UNGAP. In Table 5, max saisic rejecs he null hypohesis of no coinegraion vecor agains he alernaive as he calculaed value max are 6.49, which is exceeding he 95% criical value (4.26). Thus, on he basis of max saisic here is one co-inegraion vecors. The presence of coinegraion vecor shows ha here exiss a long-run relaionship among he variables. The Granger-causaliy mehod based on he VECM was employed o examine he long-run and shor-run casual relaionships beween he wo variables. Firsly, he Akaike Informaion Crierion was used o deermine he opimal lengh for he causaliy es. As Table 6 shows, opimal lag lengh for causaliy es is wo (2) which minimizes he AIC. The dynamic shor-run causaliy (by using Wald es) and he long-run causaliy by error correcion erm (ECT ) among he relevan variables are shown in Table 7. The causaliy effec can be obained by resricing he coefficien of he variables wih is lags equal o zero. If he null hypohesis of no causaliy is rejeced, hen we conclude ha a variable Granger-caused oher variable. To recapiulae he findings of he shor-run causaliy es, we conclude ha he hypohesis of inflaion-unemploymen is legiimae in he Pakisan s economy, as here appeared o be a negaive relaionship. In oher words, Pakisan s unemploymen rae does Granger cause inflaion in he shor-run. In he long-run causaliy es, he error correcion erm (ECT ) is saisically significan and negaive. This means ha here is a long-run Granger causaliy beween he inflaion rae and unemploymen rae. The error-correcion erm is significan wih an adjusmen coefficien of , indicaing ha inflaion rae (IFR) adjuss o is long-run equilibrium level wih 25.9% of he adjusmen aking place wihin he firs year. The sign of he ECT coefficien also specifies ha changes in he inflaion rae adjus in an opposie direcion o he previous period's deviaion from equilibrium. In oher words, he long-run Granger causaliy does confirm he exisence of he long-run equilibrium relaionship beween unemploymen rae and inflaion rae in Pakisan as indicaed in he Johansen coinegraion es. Figures 4-7 plo he impulse-response funcions of inflaion and unemploymen o he permanen and ransiory shock. The impulse-response funcions show due o consequence of ransiory and permanen shocks, here had been an increase in unemploymen, which has ulimaely reduced he inflaion rae. A shor-run and long-run radeoff beween he wo variables is observed. This adverse effec on unemploymen of a negaive demand shock is very persisen. In fac, he wo variables move in he opposie direcion a differen frequencies. Indeed, he seleced coinegraing vecor implies ha, here is a long-run relaionship beween he variables, inflaion and unemploymen. Hence, he analysis enables he conclusion ha hese supply shocks drive he rare movemen of inflaion and unemploymen in he long run. Figure 8- plo he variance decomposiion funcion of inflaion and unemploymen. The variance decomposiion analysis indicaes ha inflaion rae is he exogenous variable. A high proporion of is shock is explained by he own innovaions compared o he unemploymen. A he end of 0 years, he forecas error variance for inflaion explained by heir own innovaions is 37.8%, while he forecas error variance for unemploymen explained by heir own innovaion is 87.2%. A he end, empirical findings of he presen sudy show ha here is a long-run relaionship and also causaliy beween Pakisan s unemploymen rae and inflaion rae. These findings provide an srong empirical suppor for he exisence of he Phillips curve, in he conex of a developing counry like Pakisan. 6. Summary and Conclusion Inflaion is a universal phenomenon. Every one is affeced by inflaion. Being an economis, i is a social responsibiliy o explore he realiy menioned by Phillips Curve i.e., increased inflaion resuls ino increased job opporuniies which ulimaely lead o economic growh in he counry. This sudy provides srong empirical exisence of Phillips Curve in Pakisan, boh in he long- and shor runs. On he basis of his sudy, one can forecas he fuure rend for he nex en years will be in favor of Phillips curve. Policy makers can ge guidance from his paper for making fuure policy decisions for Pakisan. This research can be replicaed for oher developing counries especially SAARC counries, such as Bangladesh, Bhuan, India, Maldives, Nepal, and Srilanka. By assessing he exisence of he Phillips curve in SAARC economies can have more insigh. References Akaike, H. (974). A New Look a he Saisical Model Idenificaion. IEEE Transacion on Auomaic Conrol, Vol.9, pp Alogoskoufis, G. and Smih, R. (99). The Phillips Curve: The Persisence of Inflaion and he Lucas Criique: Evidence from Exchange-Rae Regime. American Economic Review, 8, pp ISSN 96-97X E-ISSN

7 Inernaional Journal of Economics and Finance Vol. 3, No. ; February 20 Arraibel, O., Rodriguez-Palenzuela, D. and Thimann, C. (2002). Inflaion Dynamics and Dual Inflaion in Accession Counries: A New Keynesian Prospecive. ECB Working Paper, No. 32. Debelle, G. and Vickery J. (998). Is he Phillips Curve: Some Evidence and Implicaions for Ausralia. The Economic Record, 74, pp Dickey, D. and Fuller, W. (979). Disribuion of he Esimaors for Auoregressive Time Series wih a Uni Roo. Journal of he American Saisical Associaion, Vol. 74, No.366, pp Dickey, D. and Fuller, W. (98). Likelihood Raio Tess for Auoregressive Time Series wih a Uni Roo. Economerica, Vol.49, No. 4, pp DiNardo, J. and Moore, M.(999). The Phillips Curve is Back? Using Panel Daa o Analyze he Relaionship Beween Unemploymen and Inflaion in an Open Economy. NBER Working Paper 7328, pp.-27. Economic Survey. ( ). Economic Survey of Pakisan. Governmen of Pakisan (2008), Finance Division, Economic, Advisor s Wing, Islamabad, Pakisan. Economic Survey of Pakisan, various issues. Governmen of Pakisan (2008), Finance Division, Economic, Advisor s Wing, Islamabad, Pakisan. Engle R. and Granger, C. (987). Co-inegraion and Error Correcion: Represenaion, Esimaion and Tesing, Economerica, Vol.55, No. 2, pp Furuoka, F. (2007). Does he Phillips Curve Really Exis? New Empirical Evidence from Malaysia. Economics Bullein, Vol. 5, No. 6 pp. -4 Friedman, M. (968). The Role of Moneary Policy. American Economic Review, 58,pp. -7 Gordon, R.J. (97). Price in 970: The Horizonal Phillips Curve. Brookings Papers on Economic Aciviies, 3, pp Granger, C. W. J. (98). Some Properies of Time Series Daa and Their Use in Economeric Model Specificaion, Journal of Economerica, 6: 2-30 Hansen, M and Pancs, R. (200). The Lavian Labour Marke Transiion: he Beveridge and Phillips Curve as Indicaors of Normalizaion, Riga: Euro Faculy. Har, R. A. (2003). Overime Working, he Phillips Curve and he Wage Curve. The Mancheser School,.7(2), pp Hasan, A, M. (990). Phillips Curve Analysis: Some Experiences from Pakisan's Economy. Journal of Economic Sudies, Volume 7, Issue, available a: hp://demo.emeraldinsigh.com/insigh/viewconeniem.do;jsessionid=4fc66a4e83d46e2a a0ea E?conenType=Aricle&hdAcion=lnkpdf&conenId=84588&hisory=rue IFS. (2008). Inernaional Financial Saisics 2008, Inernaional Moneary Fund, Washingon, available online a hp:// accessed on Mach 5, 200. Johansen, S. (99). Esimaion and Hypohesis Tesing of Coinegraed Vecors in Gaussian VAR Models, Economerica, 59(6), pp King, R.G. and Wason, M.W. (994). The Pos-War U.S. Phillips Curve: A Revisionis Economeric Hisory, Carnegie-Rocheser Conference Series on Public Policy, 4, pp Islam, F., Hassan, K., Musafa, M. and Rahman, M. (2003). The Empirics of U.S. Phillips Curve: A Revisi, American Business Review, 20(), pp Lucas, R.E. (976). Economeric Policy Evaluaion: A Criique. Carnegie-Rocheser Conference Series on Public Policy,, pp MacKinnon, J.G., Haug, A.A., and Michelis, L. (999). Numerical disribuion funcions of likelihood raio ess for coinegraion. Journal of Applied Economerics, 4, Malik, W. S., A. H. Bu. and M. A. Tashfeen. (2007). Phillips Curve Relaion over he Business Cycle: Evidence from Pakisan. Kashmir Economic Review, XVI, No., pp. -6. Masso, J. and Saehr, K. (2005). Inflaion Dynamics and Nominal Adjusmen in Balic Saes. Research in Inernaional Business and Finance, 9, pp Phelps, E. (967). Phillips Curve, Expecaion of Inflaion, and Opimal Inflaion over Time. Economica, 34, pp Phillips, A.W.(958). The Relaionship beween Unemploymen and he Rae of Change of Money Wage Raes in he Unied Kingdom. Economica, 25, pp Philips, P. C. B. and S. Ouliaris. (990). Asympoic Properies of Residual Based Tess for Coinegraion, Economerica, 58: Published by Canadian Cener of Science and Educaion 25

8 Inernaional Journal of Economics and Finance Vol. 3, No. ; February 20 Samuelson, P.A. and Solow, R.M. (960). Analyical Aspec of Ani-inflaion Policy. American Economic Review, 50, pp Sai, A. H; Wasim, S. M and Ghulam, S. (2007). New Keynesian Philips Curve for Pakisan. The Pakisan developmen Review, 46: 4, Par (Winer 2007), pp Solow, R.M. (970). Discussion of RJ Gordon s Recen Acceleraion of Inflaion and is Lessons for he Fuure. Brookings Papers on Economic Aciviies,, pp Turner, D. and Seghezza, E. (999). Tesing for a common OECD Phillips curve. OECD Economic Developmen Working Paper, NO. 29. WDI. (2009). World Developmen Indicaor, he World Bank Group, Online available a: hp://go.worldbank.org/u0fsm7aq40 accessed on March 20, 200. Table. NAIRU Esimaes Sample Period NAIRU Average UE Expeced Inflaion Source: Auhors calculaion. UE = Unemploymen Rae; UEGAP = Unemploymen Gap Falls Falls Rises Rises UEGAP R Table 2. ADF Uni Roo Tes Levels Firs Difference Consan Consan wih rend Consan Consan wih rend IFR (4) (0) * (0) * (0) UNGAP (0) (0) * (0) * (0) Noe: Figures in parenhesis indicae number of lag srucures. * indicaes significance a % level. Table 3. Opimal Lag Lengh Selecion for he Coinegraion Tes (Maximum Lag lengh = 3) Lag Lengh Noe: AIC denoes he Akaike Informaion Crierion. * indicaes opimal lag lengh seleced by AIC AIC * Table 4. The Johansen Coinegraion Tes (Trace Eigenvalue Saisic) Eigenvalue Trace Saisic 5 percen criical value Prob.** Number of coinegraing equaions None* A mos Noe: The resul corresponds o VAR s wih one lag. * denoes rejecion of he hypohesis a he 0.05 level. **MacKinnon-Haug-Michelis (999) p-values. Table 5. The Johansen Coinegraion Tes (Maximum Eigenvalue Saisic) Eigenvalue Max-Eigen Saisic 5 percen criical value prob.** Number of coinegraing equaions None* A mos Noe: The resul corresponds o VAR s wih one lag. * denoes rejecion of he hypohesis a he 0.05 level. **MacKinnon-Haug-Michelis (999) p-values. Table 6. Opimal Lag Lengh Selecion for Causaliy Tes (Maximum Lag lengh = 3) Lag Lengh Noe: AIC denoes he Akaike Informaion Crierion. * indicaes opimal lag lengh seleced by AIC AIC * ISSN 96-97X E-ISSN

9 Inernaional Journal of Economics and Finance Vol. 3, No. ; February 20 Table 7. Granger-Causaliy Tes Based on VECM (Dependen Variable: D (IFR)) Variable Degree of Freedom Wald Tes Saisics D(UEGAP) * Adjusmen Coefficien Value -saisic (ECT) ** Noe: To es for causaliy when variables are co-inegraed, he following Granger causaliy es based on he VECM could be used: D(IFR ) n i 2i D( UEGAP 2 ) n i 3 i D( IFR ) 4i ( ECT ) ) Shor-run causaliy: he join significance of he coefficiens is deermined by he Wald Tes 2) Long-run causaliy: he level of significance for error correcion erm (ECT-) is deerminedd by he -saisics. Published by Canadian Cener of Science and Educaion 253

10 Inernaional Journal of Economics and Finance Vol. 3, No. ; February 20 Figure 4-7.Impulse Response Shocks Figure 8-: Variance Decomposiion Analysis Noe: ** indicaes significance a 5% level. * indicaes significance a % levell 254 ISSN 96-97X E-ISSN