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荷兰assignment：货币经济学中通货膨胀能够降低失业率吗？
理论和政策
“失业和通货膨胀仍然盘踞着,困扰着经济学家、政治家、记者、家庭主妇、和其他人……”
通货膨胀——巴基斯坦的失业的权衡,发挥生产率和货币政策的作用 “s”
稳定的通货膨胀和充分就业是任何中央银行日常工作的两个主要目标，巴基斯坦国家银行的情况也是如此。通货膨胀被定义为“任何货币供给的增加大于硬币的增加”(罗斯巴德2004,p . 2004)。然而,为了方便起见，后者将被称为货币通货膨胀，并且通货膨胀的更一般的意义作为一种价格水平的上升将在整个讨论中使用。充分就业是指 “失业率等于自然失业率——当所有失业率是摩擦的和结构上的时,也没有周期性失业”这种情况。
本研究的目的是为了观察巴基斯坦日益增加的通货膨胀情况是否与她目前的失业率有关。
Can inflation bring down unemployment in monetary economics
THEORY AND POLICY
”Unemployment and inflation still preoccupy and perplex economists, statesmen, journalists, housewives, and everyone else...”
INFLATION – UNEMPLOYMENT TRADE-OFF, NAIRU & ROLE OF MONETARY POLICY IN PAKISTAN “s”
Stable inflation and full employment is two main goals of any central bank’s agenda and so is the case with State Bank of Pakistan. Inflation is defined as “any increase in the money supply greater than an increase in specie” (Rothbard 2004, p. 1021). For the sake of convenience however, the latter will be referred to as monetary inflation and the more general meaning of inflation as a rise in the price level will be used throughout the discussion. Full employment is a situation which occurs when “the unemployment rate equals the natural rate of unemployment – when all unemployment is frictional and structural and there is no cyclical unemployment”.
The prospect of this study is to see whether or not the situation of Pakistan increasing inflation is related to her current rate of unemployment. In the past years, inflation is showing different trends, increasing and then decreasing. The highest, 13.0, was in FY 1994-95 and lowest, 3.1, in FY 2002-03. The effect, or not, of these trends on employment is to be studied, calculated and analyzed. For this purpose, we are going to use a delicate relationship between inflation and unemployment that was studied periodically by A. W. Phillips in 1958 and his followers.
PHILLIPS AND HIS CURVE:
The New Zealand economist Alban W. Phillips, in his 1958 paper "The relationship between unemployment and the rate of change of money wages in the UK 1861-1957" published in Economica, observed an inverse relationship between money wage changes and unemployment in the British economy over the period examined. From the observation, he found that one stable curve represented the trade-off between money wages and unemployment. Simply stated, the lower the unemployment in an economy, the higher the rate of change in wages paid to labor in that economy.
W. Phillips findings can be described briefly as
From data, he concluded that there is a trade-off between unemployment rate (U) and money wage inflation (W).
Trade-off has an anticlockwise loop. He found a non-linear negative relationship between W and U. In good times when unemployment is very low, money wage rate rises at a higher rate. On the other hand, in times of adversity, when unemployment is very high, money wage rate will change at a lower rate.
In 1960, economists Robert Solow and Paul Samuelson elaborated on Phillip’s model and made clear an explicit link between inflation and unemployment showing a typical Phillips curve that’s fitted to the data for the USA between the years 1961-69. Because average inflation was very low and close to zero during much of the period analyzed by Solow et al, wage setters assumed that (expected) inflation would equal zero, so equation was applicable. The variable st and ut refer to inflation and unemployment in year t respectively. While s and are constants that refer to the markup of prices over wages and a ‘catch-all’ variable, respectively. While s is a positive parameter that captures the effect on the inflation rate of the unemployment rate, given expected inflation (Blanchard & Sheen 2004).
What this means is that “given the expected price level, which workers simply take to be last year’s price level, unemployment leads to a higher nominal wage”. That higher wage subsequently leads to a higher price level ad infinitum. This is what’s known as the wage-price spiral (ibid). So it was postulated that an increase in inflation will be a permanent fixture if unemployment is to be reduced and so both have an inverse relationship. This is shown in the figure.
The downward sloping curve shows that, in theory, there is an inverse relationship between inflation and unemployment. For example, after the economy has just been in recession, the unemployment level will be fairly high. This will mean that there is a labor surplus. As the economy grows, the aggregate demand (AD) will increase and therefore leading to an increase in employment. In the beginning, there will be little pressure for a raise in wages. However, as the economy grows faster and more people are employed, wages will slowly rise. This will increase the firm’s cost of production and the high costs are usually passed on to the customers in a form of higher prices. Therefore a decrease in unemployment has led to an increase in inflation and vice versa. Moreover, unemployed might suffer from money illusion as they thought the increase in wages offered to them represented a real wage (Sloman, 2000). They underestimate inflation by not realizing that higher wages will be eaten up by higher prices. Thus they will accept job more readily and this will reduce the frictional unemployment in the short run.
From the work of Samuelson and Solow, economists postulated that there was a real trade-off in relation to inflation and unemployment which would allow them to craft a veritable menu of economic policies. If they wanted to reduce unemployment, the economy would just have to suffer some inflation and vice-versa. The Phillips curve was “accepted as gospel by the Keynesian economic Establishment” (Rothbard 2006).
In the years following Phillips' 1958 paper, many economists in the advanced industrial countries believed that his results showed that there was a permanently stable relationship between inflation and unemployment. One implication of this for government policy was that governments could control unemployment and inflation within a Keynesian policy. They could tolerate a reasonably high rate of inflation as this would lead to lower unemployment – there would be a trade-off between inflation and unemployment. For example, monetary policy and/or fiscal policy (i.e., deficit spending) could be used to stimulate the economy, raising gross domestic product and lowering the unemployment rate. Moving along the Phillips curve, this would lead to a higher inflation rate, the cost of enjoying lower unemployment rates.
Milton Friedman and Edmund Phelps disputed this trade-off and argued that it was in fact an illusion (Blanchard et al 2004, pg. 183). They contended that rational employers and workers are only concerned with real wages (W/P where W is the nominal wage and P the price level). They believed that real wages would adjust to equate the supply of labor to the demand for labor (Hoover 1993). This would mean that the unemployment rate would settle at a “natural rate” of unemployment. Friedman and Phelps’s analysis provided for a distinction between “short-run” and “long-run” Phillips curves. As a side note, interestingly the famed Austrian School economist Ludwig von Mises foresaw both the faulty and correct theories in 1952. In 1973-75, the then seemingly impossible phenomenon of inflationary recession, i.e. stagflation struck, dealing a fatal blow to the original Phillips curve and confirming the contrarian view of Friedman et al.
The Phillips curve is regaining interest after a period in neglect and there has been considerable theoretical work suggesting a non-linear relationship between inflation and unemployment. This is so called “new Philips curve”. However, the shape of non-linearity is ambiguous since the different theories yield different non-linear relationships.
In order to test the existence of inflation and unemployment trade-off in Pakistan, we will manipulate the expectations-augmented Phillips curve, which is the combination of Short-Run and Long-Run Phillips curve, and make the rate of unemployment the dependent variable.
LITERATURE REVIEW:
Study between inflation and unemployment was also done by Irving Fischer in 1920s, (History of Economic Thought n.d.), but was not that clear in the dynamics of this relationship. But some believe that the Phillips curve should be called the "Fisher curve".
Samuelson & Solow (1960) took Phillips' work and made explicit the link between inflation and unemployment—when inflation was high, unemployment was low, and vice-versa. They named the relationship after A. W. Phillips. Lipsey (1960) placed importance on Phillips work and showed that the money wages could be taken also as price changes and hence rate of price inflation was introduced in the Phillips curve.#p#分页标题#e#
Friedman (1968) and Phelps (1969) independently altered the Walrasian model to provide monetarist theory of output determination, which could account for the observed short-run Phillips curve. They both mentioned that the curve is possible only in short run and not that exploitable. This implied that the unemployment rate could decline temporarily in response to an increase in the inflation rate, but unemployment could not be held down by persistently higher inflation.
Lahiri (1977) estimated an unobservable-variable model, to avoid certain problems associated with the use of a deterministic distributed lag function of past prices as an observable proxy for inflationary expectations, which accommodated not only some errors in measurement in the survey data on expectations but also the presence of a stochastic error term in the distributed lag function determining an unobservable variable. She incorporated four hypotheses on expectations formation, including a new one which is a mixture of both regressive and adaptive elements. The estimated coefficient corresponding to the price-expectations variable in the Phillips curve was always more than 0.50.
Mankiw (1997) also worked on this theory. He implied that inflation is inertial and inflation levels will remain high until some event increases unemployment above natural unemployment such as a recession or a supply shock. Cyclical unemployment is the deviation of unemployment from the natural rate. An increase in unemployment other than the natural rate causes cyclical unemployment to increase, and as a result the inflation rate is pulled downwards.
Snower & Karanassou (2002) paper examines how the long-run inflation-unemployment tradeoff depends on the degree to which wage-price decisions are backward- versus forward-looking. When economic agents, facing time-contingent, staggered nominal contracts, have a positive rate of time preference, the current wage and price levels depend more heavily on past variables (e.g. past wages and prices) than on future variables. Consequently, the long-run Phillips curve becomes downward-sloping and, indeed, quit flat for plausible parameter values. The paper provides an intuitive account of how this long-run Phillips curve arises.
Ribba (2003) studied to investigate both the short-run and long-run relationship between inflation and unemployment characterizing the US economy in the last 30 years. To this end a co-integrated structural VAR was built. Since unemployment does not cause inflation at frequency zero a recursive structure, with inflation ordered first, allows the identification of a permanent and a transitory shock (cf. Ribba, 1997). The main conclusions of the investigation were that: (i) in the short run, the existence of a tradeoff induced by the transitory shock is confirmed; (ii) in the long run, the two variables move one-for-one in the same direction driven by a permanent supply shock.
Karanassou, Sala & Snower (2003) studied to provide simple theoretical models that highlight two channels whereby monetary shocks have permanent real effects and the interactions between these channels and presented an empirical dynamic model, covering a panel of EU countries, and derives the implied
long-run inflation-unemployment tradeoff. Their results suggest that the tradeoff is far from vertical. They also find that wage persistence plays a larger role than price persistence in generating the tradeoff, but that the two forms of persistence are complementary in giving monetary policy its long-run real effects.
Katos & Lawler (2004) tested and comparatively estimated the “standard Phillips curve model” versus the corresponding “error-correction model” for each of the 15 European Union member-states. Using co-integration methods, the analysis provided evidence that there exists a long-run equilibrium relationship between price inflation and productivity-adjusted labor costs for all 15 EU member-states. Consequently error correction equations were estimated for all member-states. Taking into account that in the vast majority of the error-correction equations the adjustment coefficients were statistically significant the paper concluded that the relationship between the various variables is better modeled within an error-correction model than within a standard Phillips curve model. The use of the “weakly exogenous” variables of unemployment rate changes, import price changes and output growth changes in the co-integration analysis improved the results in most cases suggesting thus important implications to inflation and wage growth predictions when economic policies aim at higher output growth and lower unemployment rate.
The Phillips curve is generally been estimated in a linear framework, which implies a constant relationship between inflation and unemployment. Lately, there have been several studies, which claim that the slope of Phillips curve is function of macroeconomics conditions and that relationship is asymmetric. In his paper, Tanuwidjaja (2004) tested the negative relationship between inflation and unemployment for the United State It turned out that the Phillips curve of United State was still relevant in context.
Castelnuovo (2006) assessed the stability of open economy backward-looking Phillips curves estimated over two different exchange rate regimes. He calibrated a new-Keynesian monetary policy model and employed it for producing artificial data. A monetary policy break replicating the move from a Target-Zone regime to a Free-Floating regime implemented in Sweden in 1992 was modeled. He employed two different, plausibly calibrated Taylor rules to describe the Swedish monetary policy conduct, and fitted a reduced-form Phillips curve to the artificial data. While not rejecting the statistical relevance of the Lucas critique, he found that its economic importance does not seem to be overwhelming.
METHODOLOGY:
The Philips curve posits that the inflation rate is dependent on expected inflation (se), cyclical unemployment (u – un) and supply shocks (s). The equation takes the following form:
ssssssssssssu – unsssss
Where
ss = rate of expected inflation;
u = actual rate of unemployment
un = natural rate of unemployment
s = responsiveness of inflation to unemployment
sssserror term (supply shocks)
This equation implies that actual inflation will equal expected inflation if unemployment equals natural unemployment. This means that inflation is 100% inertial and if all else is equal, people's expectations on inflation, which will be based on last year's inflation, will be a perfect predictor of actual inflation. This may or may not be the case. Before moving on to formulate the empirical model, three assumptions need to be applied:
Past inflation is used as a proxy for expected inflation, implying an adaptive expectations model (therefore se sssss)
Natural unemployment is fixed.
Supply shocks are zero (ss=0).
Next, to illustrate that inflation is inertial but not 100% inertial, the coefficient ssis assigned to se as follows:
stsssssstssssssssu - uns
In his explanation of the Philips Curve, Mankiw posits that ss= 1, implying that actual inflation is 100% inertial. This means that prices are sticky and people's expectation of this year's inflation is heavily dependent on the level of previous year's inflation. Therefore if ssis equal to or close to one, there is little flexibility in prices and consequently wages. On the other hand, this modified Philips curve model allows forsssto be some value so as to not restrain it to the value one.
Where the long run Phillips Curve cuts the horizontal axis would be the rate of unemployment at which inflation was constant – the so-called Non-Accelerating Inflation Rate of Unemployment (NAIRU). This would be where stsssstsss
The equation which was derived after the assumptions are implied is manipulated to give the following equation:
stsssssstssssssssu – un)s
Now ssis taken to be equal to 1 (following Mankiv’s model). Hence the above equation becomes,
stssssstssssssssu – uns
Where
sts= inflation
stsss= inflation lagged by one year
u - un = cyclical unemployment
Simplifying it further,
, (= -1/s) < 0
Based on the relationship between unemployment and inflation observed in equation, a regression model was formulated with inflation as the independent variable and unemployment depending on it. This is merely changing the terms in equation into a form that can be easily recognized as a regression model:
The following hypotheses were derived from this:
1. Expected inflation (in this case, last year's inflation is used as a proxy for expected inflation) is positively related to this year's unemployment, that is, sssis expected to carry a positive sign. The rationale behind this idea is that when business people expect high inflation, they are likely to lower costs. One way to achieve lower cost is by hiring fewer workers and this directly causes higher unemployment.
2. Inflation is negatively related to unemployment, that is, sssis expected to carry a negative sign. When the government tries to lower inflation through contractionary fiscal policies, aggregate demand decreases. The resulting decreased income level makes businesses poorer and they end up hiring fewer workers.
DATA SOURCE:
The data in this study covers the time line from 1980 to 2005. It is taken from Pakistan Economic Survey 2005 and State Bank Handbook 2005. It covers two and half decade of Pakistan economic history and hence is a fair indicator for our study. We are going to take a version of Consumer Price Index (CPI) as a measure of inflation (={CPIt – CPIt-1}/CPIt-1) and unemployment rate as it is calculated (= unemployed labor force / labor force * 100). The expected inflation is based on previous year, so sssssstsss
MODEL SUMMARY:
The model summary table reports the strength of the relationship between the model and the dependent variable.
R = 0.588 shows 58.8% positive correlation between inflation and unemployment and slightly strong linear relationship.
R2 = 0.345, meaning that 34.5% of the variation in the inflation is explained by the unemployment rate. Remaining 65.5% variation is due to other factors not mentioned.
Adjusted R2 = 0.295 shows that in unbiased estimation 29.5% of the variation in the inflation is explained by rate of unemployment whereas the rest 70.5% is due to unexplained factors.
With the linear regression model, the error of estimate is very low, about 3.045.
ANOVA:
The ANOVA table tests the acceptability of the model from a statistical perspective.
F = 6.853 means that the model is not a good fit because the significance is very high and hence there are other factors which influence inflation.
The regression sum of squares is half of residual sum of squares which indicates that about one-third of the variation in inflation is explained by the model.
COEFFICIENTS:
This table shows the coefficients of the regression line.
Constant = 20.341
Slope = -1.940
This means that the regression line for estimation of inflation using rate of unemployment is
Inflation = 20.341 – 1.940 * Rate of Unemployment
The slope shows that one unit increase in rate of unemployment will cause 1.940 unit falls in inflation. This is the expected result showing inverse relationship between price inflation and rate of unemployment.
t-value for constant is 4.301 at 0.001 significance and is therefore not statistically significant.
t-value for slope is -2.618 at 0.021 significance and is therefore not statistically significant.
CONCLUSION:
The findings in the regression results aides us to know that Pakistan is showing signs of being in the period of “Short Run Phillips Curve”. One of the major conclusions of this study is that disinflation will inevitably create higher unemployment levels. This means that our increasing price inflation is related to an extent to the decreasing rate of unemployment. This period can be used by the policy makers to be manipulated and get further results in decreasing rate of unemployment by low price inflation.
Also that this is Short Run curve and is therefore no guarantee whether this will actually hold up to large periods of time, for example a period of decades. As we have empirical evidence from the world proving that it is applicable for a short run, so policy makers have to keep in mind that this period can be short lived. Also, it is possible that too much inflation, or as it is called, high inflation, causes severe unemployment, as it has also been seen, and so rather than causing a decrease might actually cause “stagflation”, a combination of inflation and stagnation (unemployment).
Even with all these restrictions, one must utilize all opportunities to their maximum limit and hence the fact should be opportunized by the economist that at this point of our economy, “YES, INFLATION IS BRINGING DOWN UNEMPLOYMENT!”
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