Expected Inflation Phenomena on Inflation and Unemployment Tradeoff - Evidence from Indonesia
Abstract
This study is about Indonesian Phillips curve from 1990 to 2019 using a VAR model. I found inflation and unemployment tradeoff, but expected inflation is negative. Negative expected inflation will face difficulties to BI in managing interest rate stemmed from economic shocks. Monetary contraction will decrease output and increase both unemployment and inflation. Conversely, monetary expansion does not experience a significant output growth. Monetary expansion should be maintained at a longer period to increase output and purchasing power, then expected inflation will undergo a dynamic process to become positive as modified Phillips curve suggested.
Keywords: expected inflation, inflation and unemployment tradeoff, Phillips curve
JEL Classification: E31, E52, O42
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References
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