Vol (II), No.1, 2015 RESEARCH ARTICLE

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1 Interdisplinary Journal of Research and Development Alexander Moisiu University, Durrës, Albania Vol (II), No., 25 RESEARC ARTICLE INVESTIGATING TE QUARTERLY INFLATION RATE, QUARTERLY UNEMPLOYMENT RATE AND TE RELATIONSIP BETWEEN TEM IN ALBANIA DURING TE PERIOD JANUARY 24 DECEMBER 23 Aurela BICAKU Lecturer Aleksandër Moisiu University, Faculty of Business Coresponding author: Alma PERMETI Ministry of Interior Affairs of Albania Fejzi KOLANECI University of New York Tirana, Albania Abstract The main objectives of the present study are: a) To test the fair game hypothesis for quarterly inflation rate in Albania during the period January 24 December 23. b) To test the fair game hypothesis for quarterly unemployment rate in Albania during the same period. c) To estimate the Pearson s coefficient of correlation and to find the linear regression equation between quarterly inflation rate and quarterly unemployment rate in Albania over the specified period. The results of the study include: i. The quarterly inflation rate as well as the quarterly unemployment rate in Albania during the period January 24 December 23 contradicts Kolmogorov s Central Limit Theorem confidence level 99.99%. ii. The inflation process as well as the unemployment process (related to the quarterly data) during the period January 24 December 23 are not a fair game confidence level 99.99%. iii.the Pearson s Coefficient of Correlation between the quarterly inflation rate and the quarterly unemployment rate in Albania during the period January 24 December 23 are equals r =.359. In other words, there exists positive moderate correlation between these two variables. iv. The Friedman s ypothesis for the relationship between quarterly inflation rate and quarterly unemployment rate during the period January 24 December 23 is moderately valid for the case of the Republic of Albania. The findings of the points i and ii are shocking for Albania Government and especially for its citizens. In the present study we apply Kolmogorov Smirnov Lilliefors test and Shapiro Wilk test for normality, using SPSS version 2 (23). Keywords: inflation rate, unemployment rate, coefficient of correlation, Central Limit Theorem, fair game. Introduction Inflation is a major focus on economic policy worldwide. Inflation is the process of a raise in the general level of prices of goods and services in an economy over a specified period of time. Most frequently, the term inflation refers to a rise in the Consumer Price Index (CPI), which measures prices of a representative fixed basket of goods and services purchased by a typical consumer, see Mankiw (27). The formula for calculating the quarterly inflation rate is: P P Inflation rate %, where P denotes P the current average price level, and P - denotes the

2 Quarterly unemployment rate and. Biçaku, Përmeti, Kolaneci average price level a quarter ago. Economists Interquartile range 2. generally agree that high rates of inflation are caused Skewness by an excessive growth of the money supply. Today, Kurtosis most economists favor a low and stable rate of inflation, because low inflation may reduce the In this study, using Kolmogorov-Smirnov-Lilliefors severity of economic recession and the risk of test as well as Shapiro-Wilk test for normality, we test destabilizing the economy, see Sargent (25), Taylor the following hypothesis (28), and Giannellis (2). : The quarterly inflation rates for Albanian over Unemployment, as defined by the International Labor Organization ( November 26, 27 ), is the state the period January 24 December 23 follow a in which the people are without jobs, they have actively looked for work within the past four weeks, and ready : The quarterly inflation rates for Albania over this to start work within two weeks. The unemployment rate is the percentage of total labor force unemployed: unemployed workers unemployment rate. One total labour force of the fundamental problems in Macroeconomics is the study of relationship between inflation and unemployment. We will analyze this relationship, over the period January 24 December 23, in Albania. The sources of the data are INSTAT and Bank of Albania. The Central Limit Theorem If all random samples ( x, x2... xn )of a reasonably large size n>3 are selected from any random variable X 2 with finite expectation µ and variance, then the probability distribution of the sample mean x is approximately normal with expectation µ and variance 2. This approximation improves with larger samples, n as n.the convergence to normal distribution is uniform for all real numbers, see Kolmogorov (22). The remainder of this paper is organized as follows: Section 2 presents the examination of quarterly inflation rate dynamics; Section 3 presents the investigation of quarterly unemployment rate dynamics; Section 4 provides the analysis of relationship between inflation and employment; and Section 5 presents the conclusion. Dynamics of the quarterly inflation rate The data set in the quarterly inflation rate over the period January 24- December 23 in Albania, see Table.We calculate the statistical parameters for the data: Sample size n = 4 > 3 Sample mean % confidence interval for mean.8384 ;.66 Median.5 Variance.46 Standard deviation.2868 Coefficient of variation.9867= 98.6% Maximum 3. Minimum -. Range 4. specified period follow a non normal - distribution. Using SPSS (version 23) we find the computed value of Kolmogorov-Smirnov-Lilliefors test=.239 and the corresponding significance level.. Now we apply the Shapiro-Wilk test for normality. The computed value of the statistics is W =.896 and the associated significance is.. Decision Rule: Reject the null hypothesis confidence level 99.99%. In other words, the Central Limit Theorem is not valid for quarterly inflation rates over the specified period in Albania, confidence level 99.99%. Definition (according to J.L.Stein and N.N.Vorobiev, 974) The inflation process is said to be a fair game if the successive differences of inflation rates follow a This important definition has found several applications in economic sciences, see Stein (974), Lucas (2), Sargent, Williams and Zha (26), Stock and Watson (27). The successive differences of quarterly inflation rate, over the period January 24 December 23, in Albania are given in Table. We present the statistical parameters related to this data set. We test the hypothesis : The successive difference of the quarterly Sample size n = 39 > 3 Sample mean % confidence interval for mean -.565;.87 Median *E-5 Variance Standard deviation Coefficient of variation Maximum 9. Minimum 4. Range 3. Interquartile range. Skewness.39 Kurtosis 6.3 inflation rates for Albania, over the period January 24 December 23, follow a : The successive difference of the quarterly inflation rates for Albania over this period follow a 2

3 Interdisplinary Journal of Research and Development Alexander Moisiu University, Durrës, Albania Vol (II), No., 25 non : The successive differences of quarterly We apply the Kolmogorov-Smirnov-Lilliefors test as unemployment rates for Albania over the period well as the Shapiro-Wilk test for normality. The January 24 December 23 follow a normal computed value of the KSL test is =.27, and the distribution computed value of SW test is W =.89. Decision Rule: Reject the null hypothesis confidence level In other words, confidence level 99.99%, the inflation process, over the period January 24 December 23, in Albania, related to the quarterly inflation rates, is an unfair game. Dynamics of the quarterly unemployment rates The data set is quarterly unemployment rates, over the period January 24 December 23, in Albania, see Table. We compute the statistical parameters for the data Sample size n = 4 > 3 Sample mean % confidence interval for mean 2.946; 3.74 Median 3. Variance.44 Standard deviation.85 Coefficient of variation.889=8.89% Maximum 7. Minimum 2. Range 5. Interquartile range. Skewness.658 Kurtosis 3.47 Using Kolmogorov-Smirnov-Lilliefors test as well as Shapiro-Wilk test for normality, we test the following hypothesis : The quarterly unemployment rates over the period January 24 December 23 follow a : The quarterly unemployment rates over this specified period follow a non- Using SPSS (version 23) we find the computed value of KSL statistics.283 and the associated significance is.. The computed value of SW test is W =.774 and the corresponding significance is.. Decision Rule: Reject the null hypothesis confidence level 99.99%. In other words, the Central Limit Theorem is not valid for quarterly unemployment rates, over the specified period January 24 December 23, in Albania, confidence level 99.99%. The successive differences of quarterly unemployment rates over the period January 24 December 23 in Albania are given in Table. We present the statistical parameters related to the data set Test the hypothesis 3 Sample size n = 39 > 3 Sample mean % confidence interval for mean -.92;.438 Median E-5 Variance 3.3 Standard deviation Coefficient of variation Maximum 9. Minimum -9. Range 8. Interquartile range. Skewness -.9 Kurtosis : The successive differences of quarterly unemployment rates for Albania over this period follow a non- We apply the Kolmogorov-Smirnov-:Iilliefors test as the Shapiro-Wilk test for normality. Using SPSS (version 23), we find for both statistical test the significance.. The computed value of SW test is W =.764. Decision Rule Reject the null hypothesis confidence level In other words, confidence level 99.99%, the unemployment process, over the period January 24 December 23, in Albania, related to the quarterly unemployment rates, is an unfair game. Relationship between inflation and unemployment Scientific analysis of the relationship between inflation and unemployment has gone through three stages. The first stage was the acceptance of a hypothesis associated with the name of British economist A. W. Phillips, who published a study in 958 showing a stable negative relationship between inflation and unemployment in the United Kingdom by using the data set from 862 to 957, see Philips (958). In this study was constructed a smooth curve which is known as Phillips curve : faster inflation is associated with lower unemployment. This relationship was widely interpreted as a causal relation that offered a stable trade off to policy makers. They could choose a low unemployment target. In that case they would have to accept a high inflation rate. Alternatively, the policy makers could choose a low inflation rate (or even deflation) as their target. In that case they would have to reconcile themselves to higher unemployment rate. Unfortunately for this hypothesis, additional data set from USA, UK,

4 Quarterly unemployment rate and. Biçaku, Përmeti, Kolaneci Germany, France, Italy, Japan, Canada, etc failed to between X and Y. Therefore, the Friedman s confirm with it. Statistical estimates of the Phillips hypothesis is weakly valid for the relationship between curve hypothesis has been the subject of an intensive quarterly inflation rates and quarterly unemployment debate. Generally, empirical findings have produced rates, over the period January 24 December 23, the mixed results. Some scientists found the in Albania. The coefficient of determination between significant trade off relation between inflation rates X and Y is d = r 2.29, which indicates that and unemployment rates, and other scientists does not, approximately 3% of the total variation in Y is see Berentsen. Menzio and Wright ( 2 ), Mulligan ( explained by the variation in X. 2 ), Zaman, Khan, Ahmad, and Beram ( 2 ), Remark Karanassou, Sala, and Snower ( 2 ), erman ( When calculating r and d = r 2, the choice of the 2 ), Lacker and Weinberg ( 27 ), etc. On the variables X and Y is arbitrary. The coefficient of theoretical side, the attack counter Phillips curve took correlation r measures linear association between the the form of the natural rate hypothesis of Phelps X and Y, and has nothing directly to say about cause (967) and Friedman (968). and effect. The natural rate hypothesis of Friedman and We find the linear regression equation Phelp s (967) states thre is some natural rate of Y = a X + b. unemployment, and that monetary policy cannot keep Given ȳ=.225, s Y =.2868, x = 3.325, s x =.85, unemployment below this level indefinitely. The and r =.359, we find a =.3664 and b = The natural rate of unemployment, a term introduced by linear regression equation is M. Friedman (968) to parallel Knut Wickell s Y =.3664X-3.63 natural rate of interest is not a constant real number, The parameters a and b of the regression line, as well but depends on random variables such as effectiveness as the coefficient of correlation r are not policyinvariant. of the labor market, the extent of competition of They would necessarily change whenever monopoly, the barriers of encouragements to working policy was changed in various occupations, and so on. The natural rate Conclusion hypothesis represents the second stage of the This study is concerned with three types of dynamic relationship between inflation and unemployment. macro models over the period January 24 This hypothesis contains the Phillips curve as a special December 23 in Albania: case. The natural rate hypothesis implicitly assumes i. Monetary macroeconomic models that focus on th relationship between inflation and inflation dynamics, unemployment is weakly stationary process in the ii. Labour macroeconomic models that focus on Doob Rozanov sense. unemployment dynamics, In recent years, in USA, UK, Germany, France, Italy, iii. Correlative and regressive models that seek to Japan, Canada, etc, higher inflation rate has often explain the relationship between quarterly accompanied by higher unemployment rate, not lower inflation rates and quarterly unemployment rates. unemployment rate as the Phillips curve would At the very high confidence level 99.99% the suggest, nor approximately the same unemployment Kolmogorov s Central Limit Theorem is not valid for rate as the natural rate hypothesis would suggest. This quarterly inflation rates. At the same confidence level is the third stage of the relationship between inflation 99.99% the inflation process, related to the quarterly and unemployment. According to the Friedman s inflation rates, is an unfair game. At the very high ypothesis, there is a positive association between confidence level 99.99% the Kolmogorov s Central inflation and unemployment, see Friedman (976). In Limit Theorem is not valid for quarterly the contemporary literature, Friedman s ypothesis unemployment rates. At the same confidence level states that If there are disturbances to aggregate 99.99% the unemployment process, related to the supply rather than aggregate demand, then high quarterly unemployment rates, is an unfair game. inflation and high unemployment can occur together, The contradiction between quarterly inflation rates or see Mankiw (27), Karanassou, Sala, a nd Snower quarterly unemployment rates and the Central Limit (2 ). Theorem is very serious, as this theorem is a Now, we calculate the Pearson s coefficient of fundamental statement of modern Probability Theory. correlation between quarterly unemployment rates and The Ministry of Finance and Bank of Albania have the quarterly inflation rates, over the period January 24 responsibility for unfair game inflation process in December 23 in Albania, see Table. X denotes Albania over the period January 24 December the quarterly unemployment rate, Y denotes the 23. In order to successfully fight the inflation quarterly inflation rates and r denote the coefficient of process or unemployment process as an unfair correlation between X and Y. Using SPSS we compute game, some concrete actions must be suggested to the r =.359, which indicates a weak positive correlation Albanian Government and Bank of Albania. 4

5 Interdisplinary Journal of Research and Development Alexander Moisiu University, Durrës, Albania Vol (II), No., 25 The main reasons for the departure of quarterly (3 ed.). London: Sage. inflation rates and quarterly unemployment rates from 4. Friedman, M. (976). Inflation and unemployment. normal distribution as well as the unfair game Nobel Memorial Lecture, December 3, 976. inflation process and unemployment process in 5. Friedman, M. (968). The role of monetary policy. Albania s market during the period January 24 American Economic Review, 58 (),-7. December 23, are: 6. Giannellis, N. (2). Nonlinearity and inflation Excess demand for several sectors of the economy rate differential persistence: Evidence from the (goods, services, money, financial assets, labor Eurozone. University of Ionnina. force, etc). 7. erman, E. (2). Inflation and unemployment in National debt and government expenditure. the Romanian economy. Annals of University of Monetary policy. Petrosani, Economics, Unemployment rate dynamics for labor costs. 8. ogg, R. V. (29). Probability and Statistical Level of corruption: Detection and penalty of Inference 8 ed. Prentice all. corrupted activities. 9. onohan, P., & Lane, P. R. (24). Divergent Money laundering process. inflation rates in European Monetary Union. ow conflicting interests are solved. Dublin: World Bank: CEPR & Trinity College.. International Labour Organization. (27, Legislative changes. 26). Resolution concerning statistics of the Imported inflation, economic recession, financial economically active population, employment, crisis. unemployment, and underemployment. Retrieved The unfair game inflation process and unfair game from: unemployment process in Albania during the period January 24 December 23 imply economic loss. Karanossou, M., Sala,., & Snower, D. J. (2). for Albanian families: the mean value of this loss Phillips curve and unemployment dynamics: A during the specified period is approximately estimated critique and a hobistic perspective.journal of 25 Albanian Lekë (ALL) per family/per month. Economic Surveys,24( ), -5. An obvious feature of our study is the severity of 2. Kolmogorov, A. N. (22). Probability Theory. rejecting the fair game hypothesis in Albania s market Moscow: Nauka. during ten years (January 24 December 23). 3. Lacker, J. M., & Weinberg, J. A. (27). Therefore, there is a very strong suspect for the Inflation and unemployment: a Laypersons's guide presence of excessive speculation in Albania s market, to the Phillips curve. Economic Quarterly, 93, 2- associated with excessive speculators In reality, the true relationship between quarterly 4. Lim, G. C., Dixon, R., & Tsiaplias, S. (29). inflation rates and quarterly unemployment rates, over Phillips curve and the equilibrium unemployment the period January 24 December 23, in Albania rate. The Economic Record, 83, is weakly consistent with Friedman s ypothesis: 5. Lucas, R. E. (2). Inflation and Welfare. there is a weak positive correlation r =.359 between Econometrica, 68(2), inflation and unemployment, as documented in the 6. Mankiw, N. G. (27). Macroeconomics, sixth paper. edition. Worth. The orthodox view thre is no long run 7. Mulligan, R. F. (2). An Austrian relationship between inflation and unemployment rehalibization of the Phillips curve. Cato Journal, seems to be not valid in the case of Albania. 3(), The unfair game inflation process and unfair game 8. Phelps, E. S. (967). Phillips curve, expectations unemployment process for Albania s case are of inflation and optimal employment over time. transitory or persistent? The answer to this question is Economica, 34(3), crucial for Albanian people. 9. Phillips, A. W. (958). The relation between *E with a minus sign signals the number of places the unemployment and the rate of change of money decimal point has to be moved to the left. wage rates in the UK, Economica,25(), References Berentsen, A., Menzio, G., & Wright, R. (2). 2. Sargent, T., Williams, J., & Tao Zha. (26). Inflation and unemployment in the long run. Shocks and Governement Beliefs: The rise and fall American Economic Review,, of American inflation. American Economics Review 2. Cogley, T., & Sargent, T. J. (25). The concept of,94(3), US inflation, Review of Economic Dynamics 8 (2) 2. Stein, J. L. (974). Unemployment, Inflation and, Monetarism. American Economic Review, 92(5), 3. Field, A. (29). Discovering Statitics Using SPSS