The relati̇onship between unemployment and i̇nflati̇on: the case of turkey

Inflation expresses the change in the value of the price index formed from the basket of goods and services determined by taking into account certain situations in the country, meanwhile unemployment is the non-employment of the workforce against their will even though they accept the terms. Both concepts reflect undesirable situations for the economy. In this direction, whether the two variables affect each other has been the subject of many studies in the literature. Following the work of 1958 Phillips, the Phillips curve (1958) began to be discussed with expectations in the 1970s. According to the Monetarist school pioneered by Friedman and Phelps, it should be considered with adaptive expectations in the original Phillips curve. According to them, there is only a Phillips curve relationship between the variables in the short run due to "workermisperception". In the same years, in the New Classical School pioneered by R. Lucas, N. Wallace and T. Sargent, it came to the fore that the Phillips curve (PC) should be handled with rational expectations rather than adaptive expectations. According to them, there is a Phillips curve relationship between two variables only in the short run and in the case of covert implementation of policies (company-misperception model). New Keynesian school economists also argued that rational expectations should be applied for PC. According to them, there can only be a relationship between two variables (nominal rigidities) in the short run. According to Post Keynesian economists, expectations are not rational. Because the future is uncertain and expectations are heterogeneous. According to them, the PC relationship continues in the long term. The aim of this study is to determine whether there is a long- or short-term relationship between unemployment and inflation in Turkey. In previous studies, it was not found that the long- and short-term relationships between the variables we used in our study were tested separately using both monthly and annual data. In this study, it is aimed to observe whether the results are consistent by considering unemployment and inflation data separately, both monthly and annually. In this direction, both annual (1986-2020) and monthly (2014:01-2021:09) ARDL cointegration analysis was conducted to determine the long-term relationship between the variables. In addition, previous studies focused on Turkey have not been found to be analyzed together with SUE and M3 in order to determine the relationship between unemployment and inflation. In the monthly analyzes of this study, these variables were considered as control variables. As a result, in the annual analysis (Equation 2), in which only the dependent variable of unemployment, inflation and LGNP were the independent variables, it was observed that there was a long-term and negative relationship among the variables. In addition, according to the error correction model of the annual analysis (Equation 1), in which inflation is considered as the dependent variable and unemployment and LGNP as independent variables, there is a negative relationship between the two variables in the short term. Whether there is a short-term relationship between the coefficients of the variables was tested with the Granger causality test in the annual analysis and the Toda-Yamamoto causality test in the monthly analysis. According to the results of the mentioned tests, there is no causal relationship between unemployment and inflation in the short run. Keywords: Unemployment, Inflation, Phillips Curve, ARDL Cointegration Approach