The Applicability of Phillips Curve to Bangladesh

Abstract

A.W.Phillips (1958) popularized the Phillips curve by drawing a relationship between the rate of inflation and the rate of unemployment in the United Kingdom from 1861 to 1957. In the 1970s, the relation broke down for both US and OECD countries. Actually, it clearly depends on the nature and structure of the economy. The main purpose of this study is to analyze the applicability of Phillips Curve to Bangladesh using the most recent macroeconomic time series data from 1995-96 to 2009-2010 for around 14 years. The Johansen multivariate Cointegration test indicates that long run Phillips curve does not exist in Bangladesh. Again, Granger causality test suggests a unidirectional positive causality from rate of inflation to rate of unemployment that is totally the opposite picture of the expected relationship in Phillips curve. The important finding is that stagflation is evident in Bangladesh