Abstract

In a developing country like Pakistan, Phillips Curve approach is employed on a data set of 35 years starting from 1975-2009. Phillips Curve helps in examining the relationship between inflation and unemployment. There is a non-proportional negative relationship between inflation and unemployment (if unemployment is reduced than there is a rising price level in the economy). Non-parametric estimates of the NAIRU are calculated. In this study, results are in the range of 3.21 – 9.01 percent. There is a long-run and casual relationship between inflation and unemployment over the above mentioned period in Pakistan. There is a transitory relationship (shocks) in the short-run, while there is a permanent relationship (shocks) in the long-run. By looking at the relationship established, one can forecast for next 10 years, that there will be an opposite relationship between both variables. This paper documents an empirical evidence for the existence of the Phillips curve in Pakistan i.e., inflation has decreased unemployment.

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