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Exact prediction of inflation and unemployment in Canada

  • Kitov, Ivan

Potential links between inflation and unemployment in Canada have been examined. No consistent Phillips curve has been found likely due to strong changes in monetary policy of the Bank of Canada. However, there were two distinct periods where linear links between inflation and unemployment could exist - before 1983 and after 1983. A linear and lagged relationship between inflation, unemployment and labor force has been obtained for Canada. Similar relationships were reported previously for the USA, Japan, France and Austria. Changes in labor force level are simultaneously reflected in unemployment and lead inflation by two years. Therefore this generalized relationship provides a two-year ahead natural prediction of inflation based on current estimates of labor force level and unemployment rate. The goodness-of-fit for the relationship is of 0.7 for the period since 1965, i.e. including the periods of high inflation and disinflation.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 5015.

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Date of creation: 25 Sep 2007
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Handle: RePEc:pra:mprapa:5015
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  1. Ivan O. Kitov & Oleg I. Kitov & Svetlana A. Dolinskaya, 2008. "Inflation as a function of labor force change rate: cointegration test for the USA," Papers 0811.0892, arXiv.org.
  2. Nelson, Edward, 2005. "Monetary Policy Neglect and the Great Inflation in Canada, Australia, and New Zealand," MPRA Paper 822, University Library of Munich, Germany.
  3. Ali Dib & Mohamed Gammoudi & Kevin Moran, 2006. "Forecasting Canadian Time Series with the New Keynesian Model," Working Papers 06-4, Bank of Canada.
  4. Doug Hostland, 1995. "CHANGES IN THE INFLATION PROCESS IN CANADA: Evidence and Implications," Macroeconomics 9508001, EconWPA.
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