Investigate the Long-Run Trade-Off between Inflation and Unemployment in Egypt

Touny, Mahmoud (2013): Investigate the Long-Run Trade-Off between Inflation and Unemployment in Egypt. Published in: International Journal of Economics and Finance , Vol. 5, No. 7 (July 2013): pp. 115-125.

Abstract

The main objective of this study is to investigate the long run trade-off between unemployment and inflation in Egypt through the period (1974-2011) using Johansen-Juselius (1990) cointegration test and Vector Error Correction Model (VECM). Results of ADF test indicate that both series are cointegrated of order one I(1). Add to that, the outcomes of cointegration analysis confirm a positive relationship between changes in inflation rate and unemployment gap in the long run, which is consistent with “Locus Critique” where a policy of inflation would fail to reduce the unemployment rate in the long run, because workers would eventually adjust their expectations of inflation. Results of the ECM have illustrated that the error-correction term is negative and significant with an adjustment coefficient of - 0.280, pointing out that changes in inflation rate adjust to its equilibrium level in the long run with 28% of the adjustment taking place within the first year.

• Item Type: MPRA Paper
• Language: English
• Keywords: unemployment, Inflation, expectations-augmented Phillips curve, unemployment gap, Johansen-Juselius cointegration analysis, Vector Error Correction Model
• Subjects: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E24 - Employment ; Unemployment ; Wages ; Intergenerational Income Distribution ; Aggregate Human Capital ; Aggregate Labor Productivity; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E42 - Monetary Systems ; Standards ; Regimes ; Government and the Monetary System ; Payment Systems; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies

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