Analysis of Causal Relationship between Unemployment and Inflation in India

Monetary policy of a country has a short term impact on inflation and the economy-wide demand for goods and services. Hence, the demand for the human resources who produce those goods and services also fluctuates. When monetary policy is used to reduce inflation, countries face problems to control unemployment. This scenario was well explained by economist A. W. Phillips in 1958, where he showed that when inflation is high, unemployment is low, and vice versa. This relationship is now well known as the Phillips curve. With the fall of aggregate demand, inflation would decline. However, if there is a decline in Real GDP, firms will employ fewer employees leading to a rise in unemployment. From the available data for Gross Domestic Product, unemployment rate and inflation rate of India for the period of 1991-2012, I have tried to statistically analyse the data. The data is available with base period as 2004.