Relationship Between Unemployment And Inflation

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The main aim of this chapter is to examine the relationship between two economic fundamentals inflation and unemployment using ordinary least square technique. The model regress the inflation rate against unemployment rate, and money supply over the period 1991-2014.
Model specification

Model specification

The study will use the time series data. This study investigates the relationship between unemployment and inflation in Namibia depending on the formulation provided by Blanchard (2005). The Phillips curve can be expressed in the following format:

_t-π_t^e=β_1 (U_t-U_(NR ) )+ e_t (6)

Where_t: The actual inflation rate at time t. π_t^e: The expected inflation rate at time t.
U_t: The actual unemployment rate prevailing at time t.
U_(NR ): The natural rate of unemployment at time t. e_t: The stochastic error term.

Since π_t^e is not directly observable, a simplifying assumption that _t=π_(t-1)^e is applied, which means that the inflation rate expected that year is the inflation rate that prevailed in the previous year. The Phillips relationship given in equation (6) is known as the modified Phillips curve or the expectation-augmented Phillips curve.
From equation 6 I obtained the linear equation 7, model to be used in the study.
_t-π_t^e=β_1 (U_t-U_(NR ) )+ e_t _t =β_(0 )+β_1 U_t + e_t (7)
Where_t: is the inflation rate is at a time of t, U_t: is the unemployment rate in country at time t. β_(0 )and β_1 are the unknown parameter that shows
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