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

Author

Listed:
  • Thanabalasingam VINAYAGATHASAN

    (Department of Economics and Statistics, Faculty of Arts, University of Peradeniya, Sri Lanka.)

  • Xiangcai MENG

    (SolBridge International School of Business, Woosong University, Uam-ro 128 (Samsung-dong), Dong-gu, Daejeon, 34613, Republic of Korea. Corresponding Author.)

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.

Suggested Citation

  • Thanabalasingam VINAYAGATHASAN & Xiangcai MENG, 2021. "The Time-Varying Tradeoff between Inflation and Unemployment: Evidence from SAARC Economies with a State Space Approach," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(3), pages 20-34, June.
    • Handle: RePEc:rjr:romjef:v::y:2021:i:3:p:20-34
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    More about this item

    Keywords

    Phillips curve; time-varying parameter model; state space approach; Kalman filter; iterative method;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications

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