The Time-Varying Tradeoff between Inflation and Unemployment: Evidence from SAARC Economies with a State Space Approach

Thanabalasingam Vinayagathasan () and Xiangcai Meng ()
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Thanabalasingam Vinayagathasan: Department of Economics and Statistics, Faculty of Arts, University of Peradeniya, Sri Lanka.

Journal for Economic Forecasting, 2021, issue 3, 20-34

Abstract: This paper contributes to the literature by examinig the charcetristics of the time-varying relationships between inflation and unemployment with a monthly dataset from four South Asian Association for Regional Cooperation (SAARC) economies: Sri Lanka, India, Pakistan, and Bangladesh. Employing a state space approach with Kalman filter and iterative methods, an extended canonical Phillips curve is estimated for each economy. Our empirical results reveal several new characteristics about the time-varying inflation-unemployment tradeoffs. First, all the estimated changing slopes of the Phillips curves exhibit cyclical fluctuations with different amplitutes and lengths. Second, no clear common trend was detected in the estimated time-varying tradeoffs between inflation and unemployment in these four economies. Third, the estimated slopes of the Phillips curves continued to fluctuate after 2010. Policy makers should consider these identified common and idiosyncratic charcateristics when designing macroeconomic policies in developing economies such as SAARC.

Keywords: Phillips curve; time-varying parameter model; state space approach; Kalman filter; iterative method (search for similar items in EconPapers)
JEL-codes: E23 E27 E52 E58 E61 (search for similar items in EconPapers)
Date: 2021
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