Examining the Role of Structural Change in a Phillips Curve: Bivariate GARCH DCC Analysis

Abstract

The aim of this study is to empirically test the stability of the traditional Phillips curve using a bivariate GARCH-DCC model. We tried to establish the dynamic correlation between consumer price index inflation and unemployment rate by considering the autoregressive conditional heteroskedasticity (ARCH) effect. Eventually, we analysed the Tunisian data spanning over the first quarter of 1974 up to the first quarter of 2016. The results revealed that the correlation sign between CPI inflation and unemployment changed from negative to positive during recession periods. Our results suggest two main implications for policymakers. First, monetary policy may have more important and long-lasting effects on unemployment during a recession period compared to a boom one. Second, since keeping the unemployment rate at a reasonable level is a priority for the monetary authorities, the CPI inflation unemployment nexus has to be evaluated before implementing any policy, especially when the economy is strong.