The causality between inflation and unemployment: the Indonesian evidence
Abstract
Two closely watched indicators of economic performance are inflation and unemployment. This study empirically analyzes the causality between inflation and unemployment in Indonesia during 1984 to 2017. The data were gathered from the Indonesian Central Bureau of Statistics. Methodologically, this study employed the Granger Causality test and Vector Autoregression to determine the causality between inflation and unemployment. The results show that there is a one-way causality between inflation and unemployment. The findings imply that unemployment causes inflation, but not vice versa. Next inflation and unemployment are also closely related to other determining factors, such as season, household income, and the decisions to attend school or to perform the housekeeping.
Keyword : granger causality, inflation, unemployment, vector autoregression
How to Cite
Sasongko, G., & Huruta, A. D. (2019). The causality between inflation and unemployment: the Indonesian evidence. Business: Theory and Practice, 20, 1-10. https://doi.org/10.3846/btp.2019.01
This work is licensed under a Creative Commons Attribution 4.0 International License.
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Pallis D (2006) The trade-off between inflation and unemployment in the New European Union Member-States. International Research Journal of Finance and Economics (1): 80-88.
Phllips AW (1958) The relation between unemployment and the rate of change of money wage rates in the United Kingdom. Economica 25 (100): 283-299.
Rosadi D (2012) Ekonometrika dan Analisis Runtun Waktu Terapan Dengan Eviews. Yogyakarta: ANDI.
Sa’idu BM, Muhammad AA (2015) Do Unemployment and inflation substantially affect economic growth? Journal of Economics and Development Studies 3 (2): 132-139 https://doi.org/10.15640/jeds.v3n2a13
Sasongko G, Huruta AD (2018) Monetary policy and the causality between inflation and money supply in Indonesia. Business: Theory and Practice 19: 80-87. https://doi.org/10.3846/btp.2018.09
Ştefan C, Bratu A (2016) The inflation-unemployment tradeoff in a macroeconometric model. British Journal of Economics, Finance and Management Sciences 12 (1): 22-31 http://www.ajournal.co.uk/EFpdfs/EFvolume12(1)/EFVol.12 (1) Article 3.pdf
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Touny MA (2013) Investigate the long-run trade-off between inflation and unemployment in Egypt. International Journal of Economics and Finance 5 (7): 115-125. https://doi.org/10.5539/ijef.v5n7p115
Ul-Haq I, Khan S, Khan A, Ahmed E (2012) Phillips curve or locus critique: time series evidence from Pakistan. Journal of Economics and Behavioral Studies 4 (4): 190-193 https://www.researchgate.net/publication/301551781_Revisiting_the_Phillips_Curve_and_the_Lucas_Critique
Umaru A, Zubairu AA (2012) An empirical analysis of the relationship between unemployment and inflation in Nigeria from 1977–2009. Economics and Finance Review 1 (12): 42-61. https://doi.org/10.1111/1467-8268.00061
Yelwa M, David OOK, Omoniyi AE (2015) Analysis of the relationship between inflation, unemployment and economic growth in Nigeria: 1987–2012. Applied Economics and Finance 2 (3): 102-109. https://doi.org/10.11114/aef.v2i3.943
Zaman K, Khan MM, Ahmad M, Ikram W (2011) Inflation, unemployment and the NAIRU in Pakistan (1975–2009). International Journal of Economics and Finance 3 (1): 245-254. https://doi.org/10.1016/S2212-5671(12)00015-910
Badan Pusat Statistik (2017a) Penduduk 15 Tahun Ke Atas Menurut Status Pekerjaan Utama 1986–2017 https://www.bps.go.id/statictable/2009/04/16/971/penduduk-15-tahun-ke-atasmenurut-%0Astatus-pekerjaan-utama-1986---2017.html
Badan Pusat Statistik (2017b) Penduduk 15 Tahun Ke Atas yang Bekerja menurut Lapangan Pekerjaan Utama 1986–2017 https://www.bps.go.id/statictable/2009/04/16/970/penduduk-15-tahun-ke-atas-yang-bekerja-menurut-lapangan-pekerjaan-utama-1986---2017.html
Badan Pusat Statistik (2017c) Penduduk Berumur 15 tahun ke atas menurut jenis kegiatan tahun 1986–2017 https://www.bps.go.id/statictable/2009/04/16/969/penduduk-berumur-15-ta-hun-ke-atas-menurut-jenis-kegiatan-tahun-1986---2017.html
Badan Pusat Statistik (2017d) Tingkat Pengangguran Terbuka (TPT) Menurut Provinsi, 1986–2017 https://www.bps.go.id/statictable/2014/09/15/981/tingkat-pengangguran-terbuka-tpt-menurut-provinsi-1986---2017.html
Bank Indonesia (2004) Laporan Perekonomian Indonesia Tahun 1998/1999. Jakarta. https://www.bi.go.id/id/publikasi/laporan-tahunan/perekonomian/Pages/LapTah 1998 1999.aspx
Bank Indonesia (2017) Tujuan Kebijakan Moneter Bank Indonesia http://www.bi.go.id/id/moneter/tujuan-kebijakan/Contents/Default.aspx
Benati L (2015) The long-run Phillips curve: A structural VAR investigation. Journal of Monetary Economics 76: 15-28. https://doi.org/10.1016/j.jmoneco.2015.06.007
Bhattarai K (2016) Unemployment-inflation trade-offs in OECD countries. Economic modelling 58 (2016): 93-103. https://doi.org/10.1016/j.econmod.2016.05.007
Blanchard O (2016) The Phillips curve: Back to the ’60s? American Economic Review 106 (5): 31-34.
https://doi.org/10.1257/aer.p20161003
Brooks C (2008) Introductory econometrics for finance (2nd ed) Cambridge University Press. https://doi.org/10.1017/CBO9780511841644
Caporale GM, Škare M (2011) Short- and long-run linkages between employment growth, inflation and output growth: evidence from a large panel. Economic and Finance Working Paper. London https://www.brunel.ac.uk/__data/assets/pdf_file/0011/127487/1117.pdf
Cioran Z (2014) Monetary policy, inflation and the causal relation between the inflation rate and some of the macroeconomic variables. Procedia Economics and Finance 16 (May): 391-401.
https://doi.org/10.1016/S2212-5671(14)00818-1
Djambaska E, Lozanoska A (2015) Foreign direct investment and unemployment evidence from the republic of Macedonia. International Journal of Economics, Commerce and Management United Kingdom, III(12): 73-85.
Edelman M (2013) What is a peasant? What are peasantries? A Briefing paper on issues of definition. Intergovernmental Working Group on a United Nations Declaration on the Rights of Peasants and Other People Working in Rural Areas, Geneva, 15-19 July 2013. Geneva http://www.ohchr.org/Documents/HRBodies/HRCouncil/WGPleasants/MarcEdelman.pdf
Ehrenberg RG, Smith RS (2012) Modern Labor Economics: Theory and Public Policy (Donna Battista, Ed) (11th ed) Boston: Pearson Education, Inc. http://fac.ksu.edu.sa/sites/default/files/Modern_labor_economics__theory_and_public_policy_0.pdf
Furuoka F (2007) Does the “Phillips curve” really exist? New empirical evidence from Malaysia. Economics Bulletin 5 (16): 1-14. http://economicsbulletin.vanderbilt.edu/2007/volume5/EB-07E20006A.pdf
Furuoka F (2008) Unemployment and Inflation in the Philippines: new evidence from Vector Error Correction Model. Philippone Journal of Development XXXV (1): 93-106. https://dirp4.pids.gov.ph/ris/pjd/pidspjd08-1unemployment.pdf
Hubacek K, Guan D, Barua A (2007) Changing lifestyles and consumption patterns in developing countries: A scenario analysis for China and India. Futures 39 (9): 1084-1096. https://core.ac.uk/download/pdf/51098.pdf
Israel K (2015) Reconsidering the long-run relationship between inflation and unemployment
http://www2.gcc.edu/dept/econ/assc/Papers 2015/ASSC 2015 - Israel, Karl-Friedrich.pdf
Ivanov V, Kilian L (2005) A practitioner’s guide to lag order selection for VAR impulse response analysis. Studies in Nonlinear Dynamics & Econometrics 9 (1): 1-36.
Katria S, Bhutto NA, Butt F, Domki AA, Khawaja HA, Khalid J (2011) Tradeoff between inflation and unemployment. In: Proceedings of 2nd International Conference on Business Management, 1-18 https://www.umt.edu.pk/icobm2012/pdf/2C-90P.pdf
Kebschull D (1987) The role of the agricultural sector in the South by. Intereconomics, 125-126.
https://doi.org/10.1007/BF02932233
Keynes JM (1936) The general theory of employment, interest, and money. MacMillan and Cambridge University Press.
Kogid M, Asid R, Mulok D, Lily J, Loganathan N (2011) Inflation-unemployment trade-off relationship in Malaysia. Asian Journal of Business and Management Sciences 1 (1): 100-108
http://www.ajbms.org/articlepdf/ajbms_2011_1124.pdf
Lütkepohl H (2006) New introduction to multiple time series analysis. New York: Springer-Verlag. Mahmood Y, Bokhari R, Aslam M (2013) Trade-off between Inflation, Interest and unemployment rate of Pakistan: A cointegration analysis. Pakistan Journal of Commerce and Social Sciences 7 (3): 482-492
http://www.jespk.net/publications/140.pdf
Mankiw NG, Euston Q, Wilson P (2013) Principles of economics: an Asian edition (2nd ed) Singapore: Cengage Learning Asia.
Okafor IG, Chijindu EH, Ugochukwu US (2016) Responsiveness of unemployment to inflation: empirical evidence from Nigeria. International Journal of Scientific Research in Science and Technology 2 (4): 173-179 https://www.researchgate.net/publication/311349523_Responsiveness_of_Unemployment_to_Inflation_Empirical_Evidence_from_Nigeria
Pallis D (2006) The trade-off between inflation and unemployment in the New European Union Member-States. International Research Journal of Finance and Economics (1): 80-88.
Phllips AW (1958) The relation between unemployment and the rate of change of money wage rates in the United Kingdom. Economica 25 (100): 283-299.
Rosadi D (2012) Ekonometrika dan Analisis Runtun Waktu Terapan Dengan Eviews. Yogyakarta: ANDI.
Sa’idu BM, Muhammad AA (2015) Do Unemployment and inflation substantially affect economic growth? Journal of Economics and Development Studies 3 (2): 132-139 https://doi.org/10.15640/jeds.v3n2a13
Sasongko G, Huruta AD (2018) Monetary policy and the causality between inflation and money supply in Indonesia. Business: Theory and Practice 19: 80-87. https://doi.org/10.3846/btp.2018.09
Ştefan C, Bratu A (2016) The inflation-unemployment tradeoff in a macroeconometric model. British Journal of Economics, Finance and Management Sciences 12 (1): 22-31 http://www.ajournal.co.uk/EFpdfs/EFvolume12(1)/EFVol.12 (1) Article 3.pdf
Thayaparan A (2014) Impact of inflation on economic growth in Sri Lanka: a study of time series analysis. Global Journal of Management and Business Research: B Economics and Commerce 13 (5): 45-54. https://doi.org/10.11648/j.jwer.20160501.11
Touny MA (2013) Investigate the long-run trade-off between inflation and unemployment in Egypt. International Journal of Economics and Finance 5 (7): 115-125. https://doi.org/10.5539/ijef.v5n7p115
Ul-Haq I, Khan S, Khan A, Ahmed E (2012) Phillips curve or locus critique: time series evidence from Pakistan. Journal of Economics and Behavioral Studies 4 (4): 190-193 https://www.researchgate.net/publication/301551781_Revisiting_the_Phillips_Curve_and_the_Lucas_Critique
Umaru A, Zubairu AA (2012) An empirical analysis of the relationship between unemployment and inflation in Nigeria from 1977–2009. Economics and Finance Review 1 (12): 42-61. https://doi.org/10.1111/1467-8268.00061
Yelwa M, David OOK, Omoniyi AE (2015) Analysis of the relationship between inflation, unemployment and economic growth in Nigeria: 1987–2012. Applied Economics and Finance 2 (3): 102-109. https://doi.org/10.11114/aef.v2i3.943
Zaman K, Khan MM, Ahmad M, Ikram W (2011) Inflation, unemployment and the NAIRU in Pakistan (1975–2009). International Journal of Economics and Finance 3 (1): 245-254. https://doi.org/10.1016/S2212-5671(12)00015-910