Testing the Existence and Stability of Phillips Curve in India

Abstract

: The major objective of this study is to test the empirical applicability of Philips Curve in the Indian context with a focus on short-run as well as long-run relationships. For empirical analysis, the study uses five decades of data from 1968 to 2018 and applied Vector Error Correction Model (VECM) after running ADF Unit root and Johansen’s cointegration. Based on the empirical analysis, the present study has observed that there is a long-run correlation between Money Supply, Inflation and Unemployment proving the relevance of the Philips curve. But, the study has observed a direct correlation between inflation and unemployment which invalidates the presence of Philips Curve in India and posed challenges to expansionary monetary policy to curb unemployment. The novelty of the study is that it provides concrete evidence for the relevance of Philips curve in the short-run as well as in the long-run using the VECM model for India since the 70s.