Inflation and Unemployment in Germany
Exact prediction of inflation and unemployment in Germany
Ivan O. Kitov
Abstract
Potential links between inflation, π(t), and unemployment, UE(t), in Germany have been examined. There exists a consistent (conventional) Phillips curve despite some changes in monetary policy. This Phillips curve is characterized by a negative relation between inflation and unemployment with the latter leading the former by one year: UE(t-1) = -1.50π(t) + 0.116. Effectively, growing unemployment has resulted in decreasing inflation since 1971, i.e. for the period where GDP deflator observations are available. The relation between inflation and unemployment is statistically reliable with R2=0.86, where unemployment spans the range from 0.01 to 0.12 and inflation, as represented by GDP deflator, varies from -0.01 to 0.07.
A linear and lagged relationship between inflation, unemployment and labor force has been also obtained for Germany. Changes in labor force level are leading unemployment and inflation by five and six year, respectively. Therefore this generalized relationship provides a natural prediction of inflation at a sixyear horizon, as based upon current estimates of labor force level. The goodness-of-fit for the relationship is 0.87 for the period between 1971 and 2006, i.e. including the periods of high inflation and disinflation.
Key words: inflation, unemployment, labor force, prediction, Germany
JEL Classification: E3, E6, J21
Introduction
This paper is a continuation of a series devoted to the change rate of labor force level as the driving force behind inflation and unemployment (Kitov, 2006abc; Kitov, 2007ab;
Kitov, Kitov, Dolinskaya, 2007ab). The principal finding of our previous studies conducted for the USA, Japan, France, Austria and Canada consists in the existence of a linear and lagged link between labor force, inflation and unemployment. In some countries, this generalized link can be separated into two independent linear links
between
Ivan O. Kitov
Abstract
Potential links between inflation, π(t), and unemployment, UE(t), in Germany have been examined. There exists a consistent (conventional) Phillips curve despite some changes in monetary policy. This Phillips curve is characterized by a negative relation between inflation and unemployment with the latter leading the former by one year: UE(t-1) = -1.50π(t) + 0.116. Effectively, growing unemployment has resulted in decreasing inflation since 1971, i.e. for the period where GDP deflator observations are available. The relation between inflation and unemployment is statistically reliable with R2=0.86, where unemployment spans the range from 0.01 to 0.12 and inflation, as represented by GDP deflator, varies from -0.01 to 0.07.
A linear and lagged relationship between inflation, unemployment and labor force has been also obtained for Germany. Changes in labor force level are leading unemployment and inflation by five and six year, respectively. Therefore this generalized relationship provides a natural prediction of inflation at a sixyear horizon, as based upon current estimates of labor force level. The goodness-of-fit for the relationship is 0.87 for the period between 1971 and 2006, i.e. including the periods of high inflation and disinflation.
Key words: inflation, unemployment, labor force, prediction, Germany
JEL Classification: E3, E6, J21
Introduction
This paper is a continuation of a series devoted to the change rate of labor force level as the driving force behind inflation and unemployment (Kitov, 2006abc; Kitov, 2007ab;
Kitov, Kitov, Dolinskaya, 2007ab). The principal finding of our previous studies conducted for the USA, Japan, France, Austria and Canada consists in the existence of a linear and lagged link between labor force, inflation and unemployment. In some countries, this generalized link can be separated into two independent linear links
between
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