Inflation-Unemployment Trade Off: Evidence from Pakistan

Abstract

High economic growth, price stability and low unemployment are the most enviable macroeconomic goals. The success of government policies is reflected in low inflation and low unemployment. The nature and costs of inflation and unemployment can have vital impact on the economy and society. Unemployment situation in Pakistan has aggravated because of rapid population growth, lacklustre economic growth, fiscal indiscipline, escalating debt-servicing and non- development expenditure which have adversely affected Pakistan economic development and poverty reduction. Import prices and fiscal indiscipline are the major causes of inflation. The empirical results show that the Phillips curve holds in Pakistan.  The reduced-form Phillips curve structure reveals that the expected inflation is significant for all periods.The current unemployment exceeds the lagged unemployment which means that unemployment has been increasing at an increasing rate and this difference causes a significant change in current inflation. Lack of governance or bad governance has remained the crux of the problem. Unless foreign policy objectives are rationalised and good governance is assured, economic problems will haunt the policy- makers and the resolution of economic problems may assume pitiless façade