What would a philips curve graph look like for the past couple of years in Brazil?

Expert Solution

The Phillips curve is an economic concept developed by A. W. Phillips that predicts that unemployment and inflation have a stable and inverse relationship. The theory claims that economic growth is accompanied by inflation, which in turn leads to more jobs and less unemployment.

Phillips curve shows that wage inflation rate decreases with the unemployment rate. Using W_t as the wage for the period, W_t-1 as the wage in the previous period, and wage inflation rate expressed by gw, it can be written as

With u* representing the natural rate of unemployment, it’s possible to write the theoretical model of the Phillips curve as

where measures the sensitivity of wages to unemployment. According to Dornbusch ^[12], this equation states that wages are falling while the unemployment rate exceeds the natural rate, that is, when , and increases when the unemployment rate is below the natural rate.

With reference to the Brazilian economy, a paper by Gustavo Antonio Ponzoni, Julcemar Bruno Zilli titled "Unemployment and Inflation: An Estimated Phillips Curve for Brazil (2002-2014)" estimates the philips curve for Brazil between 2002-2014. They found that it is possible to establish a trade-off relationship between inflation and unemployment in Brazil. This tradeoff is represented by the opposite sign of the coefficient of the variables inflation and unemployment, which validates the hypothesis of the existence of the Phillips Curve for Brazil. The short-run Phillips curve is thus roughly L-shaped for Brazil for the past few years. The inverse relationship shown by the short-run Phillips curve is expected to exist mainly in the short-run; as there is no expected trade-off between inflation and unemployment in the long run.

Rahul Sunny answered 1 year ago

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