Inflation – Unemployment Dilemma. A Cross-Country Analysis


  • Cristian Constantin Popescu “Alexandru Ioan Cuza” University of Iasi
  • Laura Diaconu (Maxim) “Alexandru Ioan Cuza” University of Iasi



unemployment-inflation relationship, Phillips, Friedman-Phelps, G7 countries


According to Phillips’ study, there is an inverse link between inflation and unemployment. The major consequence of these imbalances lies in authorities’ ability to correct one of them, usually the unemployment, by influencing the components of the aggregate demand. Phillips' opinion is later countered by Friedman’s principle of currency neutrality. Together with Phelps, Friedman argues that, in the long run, the Phillips curve is vertical and any attempt to lower the unemployment below the natural rate leads to a simultaneous rise in unemployment and inflation. This paper aims to analyze the impact of the economic policy measures on the evolution of inflation and unemployment in the G7 countries, starting from the monetary criticism regarding the inefficiency of monetary impulses. In order to achieve this purpose, the developed econometric analysis tries to identify the existence and the direction of the nexus between variables, both in the short and long term, by using causality and cointegration methods, such as Granger, Granger-Wald and Johansen tests. Our findings support Phillips model on the short run, indicating that there is an inverse link between the inflation rate and the unemployment rate in the G7 states, during the analyzed period. However, on the long run, our results indicate that inflation and unemployment can coexist, fact that allows us to agree with the monetarist theories.

Author Biographies

Cristian Constantin Popescu, “Alexandru Ioan Cuza” University of Iasi

Professor, PhD.

Department of Economics and International Relations, Faculty of Economics and Business Administration

Laura Diaconu (Maxim), “Alexandru Ioan Cuza” University of Iasi

Professor, PhD.

Department of Economics and International Relations, Faculty of Economics and Business Administration


Andolfatto, D. (1996). Business Cycles and Labor-Market Search. The American Economic Review, 86, 112-132.

Angeloni, I., Aucremanne, L., & Ciccarelli, M. (2006). Price setting and inflation persistence: Did EMU matter? Economic Policy, 21(46), 354-387.

Baxa, J., Plašil, M., & Vašíček, B. (2017). Inflation and the steeplechase between economic activity variables: Evidence for G7 countries. The B.E. Journal of Macroeconomics, 17(1), 2015-0155.

Berentsen, A., Menzio, G., & Wright, R. (2008). Inflation and unemployment in the long run. NBER, Working Paper 13924. Retrieved from

Blanchard, O. (1984). The Lucas Critique and the Vol-cker Deflation. American Economic Review, 74(2), 211-215.

Boltho, A. (1982). The European Economy. Growth and Crisis: Oxford University Press.

Bowen, W. G., & Berry, R. A. (1963). Unemployment conditions and movements of the money wage level. The Review of Economics and Statistics, 45, 163-172.

Canale, R. R., & Liotti, G. (2015). Structural adjustment and unemployment in selected eurozone countries. The Australian Economic Review, 48(2), 113-121.

De Grauwe, P. (2016). The legacy of the Eurozone crisis and how to overcome it. Journal of Empirical Finance, 39, 147-155.

Diamond, P. A. (1982). Aggregate Demand Management in Search Equilibrium. Journal of Political Economy, 90, 881-894.

Dunlop, J. T., & Zack, A. M. (1997). Mediation and Arbitration of Employment Disputes (Jossey-Bass Conflict Resolution Series) (1st ed. ed.): Jossey-Bass.

Eliasson, A. C. (2001). Is the short-run Phillips curve nonlinear? Empirical evidence for Australia, Sweden and the United States. Sveriges Riksbank Working Paper Series, No. 124. Retrieved from

Fischer, I. (1926). A statistical relation between unemployment and price changes. International Labour Review, 13(6), 185-192.

Fisher, T. C. G. (1989). Efficiency wages: A literature survey. Bank of Canada. Retrieved from

Flanagan, R. J. (1973). The US Phillips curve and international unemployment rate differentials. The American Economic Review, 63(1), 114-131.

France, R. R. (1962). Wages, unemployment and prices in the United States, 1890-1932, 1947-1957. Industrial & Labor Relations Review, 15, 171-190.

Friedman, M. (1968). The role of monetary policy. The American Economic Review, 58, 1-17.

Friedman, M. (1977). Inflation and Unemployment. Journal of Political Economy, 85, 451-472.

Goutsmedt, A., Pinzón-Fuchs, E., Renault, M., & Sergi, F. (2019). Reacting to the Lucas Critique: The Keynesians’ Replies. History of Political Economy, 51(3), 535-556.

Granger, C. W. J. (1969). Investigating Causal Relations by Econometric Models and Cross-spectral Methods. Econometrica, 37(3), 424-438.

Granger, C. W. J. (1983). Co-Integiated Variables and Error-Correcting Models. UCSD Discussion Paper, 83-13a. Retrieved from

Guerrieri, P. (2013). The Rise of Unemployment in the Eurozone: The Worst of the Crisis is Not Over. Retrieved from

Hall, R. (2005). Unemployment Fluctuations and Wage Stickiness. The American Economic Review, 95, 50-65.

Johansen, S. (1988). Statistical analysis of cointegration vectors. Journal of Economic Dynamics & Control, 12(2-3), 231-254.

Johansen, S. (1995). A Statistical Analysis of Cointegration for I(2) Variables. Econometric Theory, 11(1), 25-59.

King, R. G., Stock, J. H., & Watson, M. W. (1995). Temporal instability of the unemployment inflation relationship. Economic Perspectives, 19(3), 2-13.

Klamer, A. (1984). The New Classical Macroeconomics. Conversations with the New Classical Economists and Opponents: Wheatsheaf Books.

Leppink, J. (2019). Statistical methods for experimental research in education and psychology: Springer.

Lipsey, R. G. (1969). The relation between unemployment and the rate of change of money wage rates in the United Kingdom, 1862-1957: A further analysis. Economica, 27, 456-487.

Lucas, R. E. (1976). Econometric Policy Evaluation: A Critique. Carnegie-Rochester Conference Series on Public Policy, 1, 19-46.

Malinvaud, E. (1998). La modélisation en macroéconomie appliquée : Quarante ans après. Cahiers Economiques de Bruxelles, 160, 329-342.

Mankiw, N., & Romer, D. (1991). Introduction. In N. Mankiw & D. Romer (Eds.), New Keynesian Economics (pp. 1-26). Cambridge: MIT Press.

Mavroeidis, S., Plagborg-Møller, M., & Stock, J. H. (2014). Empirical Evidence on Inflation Expectations in the New Keynesian Phillips Curve. Journal of Economic Literature, 52(1), 124-188.

Molico, M. (2006). The distribution of money and prices in search equilibrium. International Economic Review, 47, 701-722.

Moore, G. H. (1983). Employment, unemployment and the inflation-recession dilemma. In G. H. Moore (Ed.), Business cycles, inflation and forecasting (2nd ed. ed., pp. 211-212): Ballinger.

Musso, A., Stracca, L., & van Dijk, D. J. (2009). Instability and nonlinearity in the euro area Phillips Curve. International Journal of Central Banking, 5(2), 181-212.

Önder, A. Ö. (2009). The stability of the Turkish Phillips curve and alternative regime shifting models. Applied Economics, 41(20), 2597-2604.

Perry, G. L. (1964). The determinants of wage rate changes and the inflation-unemployment trade-off for the United States. The Review of Economic Studies, 31, 287-308.

Perry, G. L., Schultze, C., Solow, R., & Gordon, R. A. (1970). Changing labor markets and inflation. Brookings Papers on Economic Activity, 3, 411-448.

Phelps, E. (1968). Money-wage dynamics and labour market equilibrium. Journal of Political Economy, 76, 678-711.

Phillips, A. W. (1958). The relation between unemployment and the rate of change of money wage rates in the United Kingdom, 1861-1957. Economica, 25, 283-299.

Piore, M. J. (2017). Unemployment and Inflation: Institutionalist and Structuralist Views: Routledge.

Samuelson, P. A., & Solow, R. M. (1960). Analytical aspects of anti-inflation policy. The American Economic Review, 50(2), 177-194.

Sargent, T. J. (1980). Rational Expectations and the Reconstruction of Macroeconomics. Federal Reserve Bank of Minneapolis Quarterly Review, 4(3), 15-19.

Schmidt, M. G. (1986). The Politics of Labour Market Policy Structural and Political Determinants of Rates of Unemployment in Industrial Nations. In F. G. Castles, F. Lehner, & M. G. Schmidt (Eds.), Managing mixed economies: W. de Gruyter.

Sergi, F. (2018). DSGE Models and the Lucas Critique. A Historical Appraisal. UWE Bristol, Economics Working Paper Series 1806. Retrieved from

Seyfried, W. L., & Ewing, B. T. (2001). Inflation Uncertainty and Unemployment: Some International Evidence. The American Economist, 45(2), 33-39.

Shi, S. (1995). Money and prices: A model of search and bargaining. Journal of Economic Theory, 67, 467-496.

Simler, N. J., & Tella, A. (1968). Labor reserves and the Phillips curve. The Review of Economics and Statistics, 50, 32-49.

Smith, R., & Zoega, G. (2007). Global unemployment shocks. Economics Letters, 94(3), 433-438.

Thornton, J. (1988). Inflation and Output Growth: Some Time Series Evidence, A Note. The American Economist, 32(2), 55-58.

Tobin, J. (1972). Inflation and unemployment. The American Economic Review, 62(1/2), 1-18.

Triffin, R. (2014). Europe and the money muddle (revisited). PSL Quarterly Review, 31(124).

Verdugo, G. (2016). Real wage cyclicality in the Eurozone before and during the Great Recession: Evidence from micro data. European Economic Review, 82, 46-69.

Weber, A. A. (1994). Testing Long-Run Neutrality: Empirical Evidence for G7 Countries with Special Emphasis on Germany. Center for Economic Policy Research, Discussion Paper No. 1042. Retrieved from

Yates, A. (1998). Downward nominal rigidity and monetary policy. Retrieved from




How to Cite

Popescu, C. C., & Diaconu (Maxim), L. (2022). Inflation – Unemployment Dilemma. A Cross-Country Analysis. Scientific Annals of Economics and Business.




Most read articles by the same author(s)