1. Research into the Philips curve is concerned with providing empirical evidence of a tradeoff between inflation and unemployment. Can an economy experience lower unemployment rate if it is prepared to accept higher inflation? The data set contains the changes in unemployment rate (ΔU) and the changes in inflation (ΔP) for the United States for the sample period 1976:07 to 2005:06. A VAR model was estimated as follow:
ΔUt = 0.160ΔUt-1 - 0.026ΔPt-1
(t) (3.805) (0.509)
ΔPt = -0.068ΔUt-1 + 0.344ΔPt-1
(t) (-2.122) (8.611)
a. Is there evidence of an inverse relationship between the change in the unemployment rate (ΔU) and the change in inflation rate (ΔP)?
b. What is the response of ΔU at time t+1 following a unit shock to ΔU at time t?
c. What is the response of ΔP at time t+1 following a unit shock to ΔU at time t?
d. What is the response of ΔU at time t+2?
e. What is the response of ΔP at time t+2?