The Unemployment-Inflation Puzzle: A Re-evaluation of the Phillips Curve and NAIRU Dynamics

Sayed Masood  Habibi; Abdul Rahman  Adeli

doi:10.61231/182fna54

Authors

Sayed Masood Habibi Department of National Economy, Faculty of Economics, Farah University, Afghanistan
Abdul Rahman Adeli Department of National Economy, Faculty of Economics, Nimruz University, Afghanistan

DOI:

https://doi.org/10.61231/182fna54

Keywords:

NAIRU, Potential Output, Phillips Curve, ARDL Model, Stagflation

Abstract

The relationship between inflation and unemployment remains one of the most contentious issues in macroeconomics, influencing the efficacy of monetary and fiscal policies. This research aims to re-evaluate the traditional Phillips Curve trade-off and the concept of the Non-Accelerating Inflation Rate of Unemployment (NAIRU) within the context of a developing economy, specifically focusing on Afghanistan. The study critically analyzes whether the traditional inverse relationship holds in environments characterized by structural rigidities and supply-side shocks. Employing the Autoregressive Distributed Lag (ARDL) model to examine time-series data spanning from 2001 to 2020, the study investigates the dynamic short-run and long-run interactions between these variables. The findings challenge the conventional wisdom: while a short-run analysis reveals a positive and statistically significant correlation between inflation and unemployment—contrary to the standard Phillips Curve—the long-run relationship, though negative, is statistically insignificant. This anomaly suggests that in conflict-affected, developing economies, supply-side constraints and structural impediments may dominate the labor market dynamics, rendering traditional demand-management policies less effective in sustaining employment without exacerbating inflation. The novelty of this study lies in highlighting the breakdown of the Phillips Curve mechanism in fragile states and questioning the applicability of NAIRU in such contexts.

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