Phillips curve inflation and unemployment: an empirical research for Greece

The relationship between inflation and unemployment was first introduced in 1958 by Phillips who found a negative relationship between unemployment and money wage growth in the UK. However, this relationship appeared to become unstable in many countries over the 1970s. This paper investigates the relationship between inflation and unemployment in Greece using annual data from 1980 until 2010. To examine the long-run relationship for the case of Greece we use the cointegration test applying the Johansen (1988) maximum likelihood procedure while Granger causality test is obtained by the Vector Autoregression (VAR). The results show that there is a long-run and causal relationship between inflation and unemployment for the aforementioned period. Finally, the impulse responses applied for the 10-year forecasting, suggest that shocks in inflation rate cause a reduction on unemployment index for the first years, following by a slight rise for the remaining years under examination.