The Dynamic Phillips Curve Revisited: An Error Correction Model

Abstract

In this paper, we apply different unit root tests on five macroeconomic variables. Nearly all our data exhibit unit root phenomenon, confirming results well-known in the literature. Co-integration tests indicate that there exists one set of co-integration relation in the unemployment- inflation equation. The VAR error correction model explains the expected short-term behavior of changes in unemployment rate on the inflation rate on inflation two years later.
Keywords: Correction model, Phillips Curve, Vector autoregression.