İtobiad (Dec 2021)
The Analysis of the Validity of the Phillips Curve in Turkey via the Fourier Cointegration and Causality Tests
Abstract
Inflation and unemployment indicators are among the most significant success criteria of a country’s economy. Thus, since the increase in inflation and unemployment rates decreases the welfare levels of countries, policymakers aim to keep both inflation and unemployment at low levels and establish their monetary and fiscal policies accordingly. According to the Phillips curve, which reveals the correlation between inflation and unemployment in the macroeconomic literature, an increase in inflation leads to a decrease in unemployment, and while inflation decreases, unemployment increases, which indicates an inverse correlation between inflation and unemployment. In this respect, it is not possible to find a solution for both inflation and unemployment simultaneously with the policies to be implemented if the Phillips curve is valid in the economy. This study aims to reveal whether the Phillips curve is valid or not by investigating the correlation between inflation and unemployment, which were among the most important economic problems within the 2006:01 – 2020:11 period in Turkey. In line with this purpose, the Fourier ADF and Fourier KPSS analyses were carried out first, and it was concluded that the relevant variables were not stationary at the level, and they were stationary in their first differences. With the Fourier cointegration analysis conducted later, no long-run correlations between the variables were determined. Finally, the Single Fourier-Frequency Toda & Yamamoto causality analysis was carried out, and it was attempted to reveal whether there was a short-run correlation between the variables. According to the results of the causality analysis, no causality correlations were observed both from inf to unemp and from unemp to inf, and it was revealed that changes in inflation did not influence unemployment, and changes in unemployment did not influence inflation in the short run. In this context, it was concluded that the Phillips curve, suggesting an inverse correlation between inflation and unemployment, was not valid for Turkey within the framework of the period considered and the analyses performed.
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