The relationship of real Gross Domestic Product (GDP), inflation, and unemployment in the Philippines (1970-2011)

Abstract

Residuals. Diagnostic checking was used to check on heteroscedasticity, normality, and serial correlations. The Granger Causality Test was used to know if changes in a variable would impact other variables which showed that all variables do not Granger-cause each other. After performing the tests, there exist significant short-run relationships between real GDP and CPI; between real GDP and UP; and between CPI and UP. The verifications of inverse relationship between real GDP and CPI, Okun's Law, and Phillips curve in the Philippines were not justified since the models do not have long-run relationships. Reasons enumerated to explain the relationships existing among the variables in the Philippines: (1) heavy dependence on external finance and response on crises (relationship between GDP and CPI); (2) structural issues, relatively high redundancy cost, heavily regulated hiring/firing practices (relationship between GDP and UP); (3) implementation of inflation targeting, globalization of markets, and rigidity in the labor market (relationship between CPI and UP).