Exploring the Phillips Curve: Inflation and Unemployment Dynamics in Pakistan

Abstract

Using a strict analytical framework, this study investigates the dynamic link between inflation and several macroeconomic variables (unemployment, crude oil prices, and nominal exchange rate) in Pakistan from 1991 to 2019. Utilizing a diverse array of statistical methodologies, including unit root analysis, cointegration analysis, and dynamic ordinary least squares (DOLS), we assess the applicability of the Phillips Curve theory in predicting fluctuations in inflation. According to our findings, Pakistan exhibited a steady Phillips Curve over the study period, with all models demonstrating good tracking performance of changes in inflation. Furthermore, the CUSUM and CUSUMsq tests validate the stability of our estimates. This analysis contributes to our understanding of Pakistani inflation dynamics and has implications for economic policy in the nation.