Econometrics

Table of Contents

ABSTRACT 1

INTRODUCTION 2

Inflation 2

Causes of Inflation 2

Different degrees of Inflation 3

Unemployment 4

Causes of unemployment 4

Relationship between Inflation and Unemployment 6

LITTERATURE REVIEW 7

EMPIRICAL EVIDENCE 9

SIMPLE REGRESSION: TWO VARIABLES SCENARIO 12

DATA SUMMARY AND ANALYSIS 12

Scatter Graph 15

The above stata results shows the negative relationship that exist between inflation and unemployment with a negative coefficient of -0.4602. 16

Reciprocal Model 16

MULTIPLE REGRESSIONS: 18

THREE VARIABLES SCENARIO 18

Data Summary 19

Checking for linearity – graphical representation 20

TEST FOR MULTICOLLINEARITY 22

22

CONCLUSION 23

REFERENCE 24

ABSTRACT

The Phillips Curve depicts a relationship between inflation and unemployment in graphical or equation form. The assignment is based on an analysis on the link between the above mentioned economic factors in Mauritius from year, where a brief overview on those elements will be discussed. The study will test whether Philips Curve applies to this country or is it merely theoretical. It is normally based on a reciprocal model, and thus this model will be used at the beginning to analyze the relationship between inflation and unemployment. The main implication of this theory is that it is unable to combat those two macroeconomics factors simultaneously. Different data will be used in order to calculate meaningful information out of them and distinct test will be carried out to examine the significance of the Phillips Curve.

INTRODUCTION

A study of Key Terms:

Inflation

Inflation is defined as a period whereby there is a persistent or sustained increase in the general price level. The impact of inflation in an economy can be both positive and harmful. Common adverse effects of inflation include a rise in the opportunity cost of holding money, ambiguity over future inflation which may discourage investment and savings. Positive effects include ensuring that central...