Abstract

The Dynamism of Inflationary and Employment Trends. A Theoretical and Econometric Analysis

It is the aim of the present article to analyse some dynamic relations between inflation and employment. The analytical framework is based on the implications of the original Phillips-Curve and a hypothesis of dynamic price determination. Thus a function between the growth of the inflation rate and the employment rate is introduced. Additional assumptions concerning the sphere of production make it possible to formulate a further relation between the changes in the rates of employment and inflation. Both functions constitute a nonlinear first-order differential equations system which shows the interdependence as well as the dynamic structure of inflation and employment. The trajectories and the initial conditions of this system determine the time paths of the economic variables involved. In addition to the trivial solution there exists only one pair of values for the employment and inflation rate, at which both variables remain constant in the course of time. These values are defined as “natural employment or unemployment rate” and as “natural inflation rate”. They are both above zero. Only in case both natural values are realized simultaneously the economy enters a state of constant levels in inflation and employment. As the natural values depend on the structural parameters of the model, they are due to changes in the course of time and they may shift the centres of the trajectories. In that case the time paths of inflation and employment rates assume the form of a loop. Coincidence of such theoretically deduced movements with those observed in reality suggests empirical relevance of the model which is clearly supported by econemetrical analysis.