Page 11 - AEI Insights 2020 - Vol. 6, Issue 1

Furuoka et al, 2020

Countries Slope parameter Intercept Natural rate of
unemployment (u*)
(α) (αu*)
Cambodia -0.99 1.48 1.57
Lao 1.23 -1.50 1.21

Malaysia -3.31 4.34 3.41
Myanmar -0.66 2.28 1.10
Philippines -0.33 1.33 3.51

Singapore -0.50 2.26 4.26
Thailand -0.21 0.14 0.68

Vietnam 0.90 -1.66 1.78
Table 3: Static natural rate of unemployment in ASEAN

It should be noted that there is a negative relationship between unemployment and inflation.
For example, in the economic downturn, there would be a decrease in product demand which
might cause a lower inflation rate. At same time, there would be a decrease in derived demand
for labour which might cause a higher unemployment rate. By contrast, in times of economic
boom, there would be an increase in product demand which might cause a higher inflation rate.
At the same time, there might be an increase in the derived demand for labour which would
cause a lower unemployment rate. This negative association between unemployment rate and
inflation rate is known as the Phillips curve (Phillips, 1958). In the empirical analysis, there are
two main types of Phillips curve, namely the traditional or baseline Phillips curve and the New
Keynesian Phillips curve (Staiger et al., 1997; Gali and Gertler, 1999). The baseline Phillips
curve could be expressed as (Staiger et al., 1997; Gali and Gertler, 1999):

= + −1 ( ) (6)

where x is economic slack which is measure by a difference between actual output and natural
rate of output or a difference between actual unemployment and natural rate of unemployment,
κ is slope parameter of the Phillips curve, −1 ( ) is expected current inflation rate. In the

empirical analysis, an expected current inflation rate is considered to be equal to a lagged
inflation rate or πt-1. The New Keynesian Phillips curve could be expressed as (Staiger et al.,
1997; Gali and Gertler, 1999):

= + ( +1 ) (7)

where ( +1 ) is expected future inflation rate. In the empirical analysis, country-specific

inflation expectation is not available. So, researchers often use the realised inflation rate in the
next period or πt+1 as a proxy for the expectations of future inflation rate (Levy, 2019). The
slope parameter in the Phillips curve (CV) and the New Keynesian Phillips curve (NKPC) in
ASEAN countries are reported in Table 4. As the findings indicate, the slope coefficients in
the PC are negative in all ASEAN countries, except Singapore, in line with theoretical negative
association between lagged inflation rate and unemployment gap. The findings also indicate

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