Nexus between unemployment and inflation in Sri Lanka

Abstract

Phillips in his study confirmed that there was inverse relationship between inflation and unemployment rates but in Sri Lankan context, this relationship was not statistically proofed which is the gap of this study. The objective of this study was to test the nexus between the unemployment and the inflation rates. To test this objective, the annual time series data from 1959 to 2015 were considered and the multiple regressions model by OLS estimators were employed to test the nexus between the inflation and unemployment rates. In this study, the inflation rate was considered as dependent variable and the unemployment rate was employed as key independent variable. Furthermore, the interest rate and money supply in this study were used as controlled variables. Based on the multiple regression results, this study confirmed that the Phillips concept of the relationship between the inflation and the unemployment rates. It means that there was inverse relationship among the unemployment and the inflation rates in Sri Lanka during the sample periods.