Modeling the Phillips Curve: A Quantitative Analysis of Inflation and Unemployment in India

Abstract

This systematic review explores the relationship between inflation and unemployment in India through the lens of the Phillips Curve. By analyzing a comprehensive collection of empirical studies and economic data, we investigate the applicability and evolution of the Phillips Curve in the Indian context. Our review encompasses research spanning several decades, employing various econometric techniques and theoretical frameworks. We examine the short-term and long-term dynamics of the inflation-unemployment trade-off, considering factors such as supply shocks, structural changes, and monetary policy shifts. The findings reveal a complex and time-varying relationship between inflation and unemployment in India, challenging the simplistic inverse relationship proposed by the original Phillips Curve. This review contributes to the ongoing debate on the relevance of the Phillips Curve in emerging economies and provides insights for policymakers navigating the delicate balance between price stability and employment objectives.

Introduction

The Phillips Curve, introduced by A.W. Phillips in 1958, describes an inverse relationship between inflation and unemployment, suggesting a trade-off faced by policymakers. While well-studied in developed economies, its relevance in emerging markets like India remains debated due to India's unique economic conditions.

This systematic review aims to evaluate the evidence for the Phillips Curve in India by assessing empirical studies, methodologies, influencing factors, and policy implications, while identifying research gaps. Following PRISMA guidelines, the review analyzes studies from 1980 to 2023 that focus on India’s inflation-unemployment dynamics using quantitative methods.

The review covers the theoretical evolution of the Phillips Curve: the original static trade-off model, the expectations-augmented version introducing the natural rate of unemployment, the New Keynesian Phillips Curve emphasizing forward-looking inflation expectations, and hybrid models combining backward- and forward-looking elements.

Empirical evidence from India shows mixed results:

• Early studies (1980s-1990s) found weak or short-run negative relationships between inflation and unemployment, often impacted by structural factors.

• Studies in the 2000s used advanced econometrics, revealing time-varying and unstable Phillips Curve relationships.

• Recent research employs New Keynesian frameworks, incorporating forward-looking expectations and global influences, reflecting a more complex inflation-unemployment interaction in India.

Conclusion

This systematic review has synthesized the empirical evidence on modeling the Phillips Curve in India, revealing a complex and evolving relationship between inflation and unemployment. While the existence of a short-run trade-off is generally supported, the nature of this relationship is found to be unstable, time-varying, and potentially nonlinear. Future research on the Phillips Curve in India could benefit from the following directions: 1) Incorporating more granular data: Using regional or sector-specific data could provide insights into heterogeneity in the Phillips Curve relationship across different parts of the Indian economy. 2) Exploring alternative measures of labor market slack: Given the large informal sector in India, traditional unemployment measures may not fully capture labor market dynamics. Research using alternative measures of slack could provide more robust estimates of the Phillips Curve. 3) Investigating the role of global factors: As India becomes more integrated into the global economy, research examining the influence of global inflation and output gaps on domestic inflation dynamics could yield valuable insights. 4) Applying machine learning techniques: Advanced machine learning methods could potentially uncover more complex, nonlinear relationships in the data that traditional econometric approaches might miss. 5) Conducting microeconomic studies: Firm-level or household-level studies on price-setting behavior and wage dynamics could provide a deeper understanding of the microfoundations of the Phillips Curve in the Indian context. 6) Examining the impact of structural reforms: Studies investigating how major economic reforms (e.g., the introduction of inflation targeting, goods and services tax) have affected the Phillips Curve relationship could inform future policy decisions. In conclusion, while the Phillips Curve remains a valuable framework for understanding inflation dynamics in India, its application requires careful consideration of the country\'s unique economic structure and evolving macroeconomic landscape. As India continues to develop and integrate into the global economy, ongoing research on the inflation-unemployment relationship will be crucial for informing effective monetary policy decisions and promoting sustainable economic growth.

References

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Copyright

Copyright © 2025 Kaivalya Gabhane. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.