Unemployment and Inflation: An Estimated Phillips Curve for Brazil (2002-2014)

Abstract

The relationship between inflation and unemployment has been discussed in different economic levels seeking an understanding of the interrelationships existing in the Brazilian economy and how the information is passed on and used by the decision makers. Thus, this study’s main objective is to analyze the ability of the Phillips curve to describe the dynamics of Brazilian inflation, using aggregate data from 2002 to 2014. After the estimated model it was possible to conclude that this can’t either be considered well adjusted, nor a full explanation to the Brazilian inflationary dynamics. It was also verified that the inflation expectation had greater impact on the formation of the current inflation than the past inflation. This increased weight of future inflation in the formation of the current inflation can be explained in terms, by the theory of rational expectations. The effects of an exchange rate shock remains having direct influence on the formation of internal prices and, as a consequence, on the inflation.

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