Inflation and Unemployment in Germany

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Exact prediction of inflation and unemployment in Germany
Ivan O. Kitov

Potential links between inflation, π(t), and unemployment, UE(t), in Germany have been examined. There exists a consistent (conventional) Phillips curve despite some changes in monetary policy. This Phillips curve is characterized by a negative relation between inflation and unemployment with the latter leading the former by one year: UE(t-1) = -1.50π(t) + 0.116. Effectively, growing unemployment has resulted in decreasing inflation since 1971, i.e. for the period where GDP deflator observations are available. The relation between inflation and unemployment is statistically reliable with R2=0.86, where unemployment spans the range from 0.01 to 0.12
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Estimates of the total labor force have been revised from 1987 on, based on census results, and show a break between 1986 and 1987. Prior to 1984, annual data for the labor force are averages of monthly and annual estimates supplied by German authorities.
Annual unemployment figures correspond to unemployed persons registered at the end of the month of September of each year. From 1984, annual average figures are consistent in terms of methodology and contents with the results of the annual European Labour Force Survey based on the national Microcensus conducted once a year in April.


Therefore one might expect some breaks in linear relationships between the studied variables: labor force, inflation, and unemployment. However, as shown in
Section 1, the Phillips curve for Germany demonstrates no breaks. The absence of any breaks evidences in favor of general comparability of the measurements over time.
This paper is primarily aimed at revealing the generalized relationship between the change rate of labor force level, inflation and unemployment in Germany. Also, individual relationships between the change rate and inflation, and the change rate and unemployment are investigated.

These relationships allow answering fundamental

questions addresses in numerous studies of inflation and unemployment. For example,
Can central
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