Macroeconomic Problems and Analysis

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In recent years, "inflation targeting" is one of the major macroeconomic policy instruments in Australia. Under this regime, it has been argued that "Phillips Hypothesis" is no longer appropriate to achieve a trade-off between inflation and unemployment. Investigate this argument with the Australian inflation and unemployment data in between 1994 to 2004.


According to his published article, Phillips posited that when unemployment rate fell, inflation tended to rise and vice-versa, thus, the apparent link between these economic factors. (Cobham, 1998)
However, with the recent economic trends, economists of various countries noted that low inflation can, in fact, coexist with low unemployment rate (Oliver, 1999). Such observed trend is deemed to be contrary to the hypothesis of Phillips.
This paper discusses the inflation and unemployment rate trend in Australia from 1994 to 2004. The paper aims to provide an explanation as to why the "Phillips Hypothesis" is regarded as an insufficient or inapplicable too to be used in analysing the relationship between the two economic factors.
For over 40 years, the link between inflation and unemployment has been intensely debated upon by economists all over the world (Oliver, 1999). They hypothesis postulated by Phillips has been subjected to myriad criticisms regarding its ability to explain the inflation-unemployment relation. For instance, in the 1970s, the Phillips curve fell short of elucidating why many countries experienced stagflation - an economic condition characterised by high level of unemployment coupled with high level of inflation ("Wikipedia," 2005).
With this, new theories emerged to better illustrate the observed link between ...
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