Does the Phillips Curve exist in Indonesia? A Panel Granger Causality Model

Abstract

The short-term economic problems such as inflation and unemployment are among the most important macroeconomic problems at all times.Emprirical study was conducted with a purpose to analyze the causality of the inflation rate and the open unemployment rate of 33 provinces in Indonesia from 2013 to 2017.Indonesia's geographic condition which consists of thousands of islands is a note that macro policies at the time of implementation require a long process, even need to be adjusted to pay attention to aspects of regional variation.Therefore, the Panel Data Model and Panel Granger Causality becomes an alternative to capture the possibility of variations between regions in the short term.The study showed that there was a one-way causality relationship from the inflation rate to the open unemployment rate.The trade-off between the inflation rate and the open unemployment rate was a short-term economic phenomenon, so the Sticky Price condition still applied.We foud that in provinces of Indonesia the inflation rate was conditioned mainly by Demand-Pull Inflation.Thus, an effective inflation management could reduce the open unemployment.Thus, the role of government in managing the economy cannot be underestimated, both through fiscal and monetary policies.This role isemphasized more on the government's efforts to stimulate the Demand Side Economics.

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