Journal of Business & Economic Policy

An Exploration of the Long Run Tradeoff between Inflation and Unemployment in México in the Last Fifteen Years
Alejandro Rodríguez-Arana

Abstract
This paper sets a partial equilibrium model of the determination of price inflation and that of wages. When there is an incomplete nominal adjustment of these variables, a long run tradeoff between inflation and unemployment arises. An ARDL version of the proposed model is estimated for the case of México. The estimation strongly rejects complete nominal adjustment of price inflation and that of wages to foreign inflation and the rate of growth of the minimum wage. We found a long run tradeoff between inflation and unemployment and also a similar relation between the rate of growth of the real wage and unemployment. These tradeoffs survive even in the hypothetical case where the rate of growth of the nominal wage and foreign inflation are perfectly indexed to both of the endogenous types of inflation described. The Phillips curve in prices is almost horizontal, a modest increase in inflation reduces unemployment considerably.

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