|Department of Economics|
Investigation of the Phillips Curve for Azerbaijan Economy: 2006 – 2014
(Supervisor:Nesrin Sungur Çakmak / R. Barış Tekin)
ABSTRACTA clear understanding of the inflationary process is crucial for the Central Banks in order to make effective price stabilization. Phillips Curve is widely used as a forecasting tool despite an important amount of criticism. The concrete idea behind the Phillips Curve is to define influence level of economic activity on the general level of prices.
Phillips curve has an important theoretical and political implication both in developed and in developing countries. Central Banks try to develop monetary policies and to make choice using this relationship by their references.
Our aim was to find the validity of the Phillips Curve relation for the Azerbaijan economy in the frame of this study. We used more relevant non-oil GDP figures for our investigation, despite the fact that GDP of Azerbaijan Republic mainly consists of the oil revenues, which depends on world oil prices, and domestic policy does not have an influence on it.
Results of our study showed a positive relationship between inflation and non-oil GDP growth in the short run, where relation goes from GDP to inflation. It means that increase in output made inflation to rise initially (demand side effect). Then, this relation turns to negative in the long term and output growth leads to decrease in inflation (supply side effect). According to these findings, we can state that the Phillips Curve relation is a short run event in Azerbaijan economy. In the long term, other factors dominate and the Phillips Curve relation disappears.