Inflation and unemployment in Mexico: An asymmetric and non-linear relation

Resumen

The relation between inflation and unemployment in the Mexican economy over the period 2005-2025 is assessed. We first review the debate on the Phillips curve argument; then, the hypothesis of a long-term non-linear and asymmetric relation between inflation and unemployment, put forth by Palley’s Minimum Unemployment Rate of Inflation(MURI), is empirically tested. Our main contribution shows that inflation responds in a non-linear and asymmetric manner to unemployment intensity and to increases in the unemployment rate. Our econometric test supports Palley’s contention regarding the existence of a more complex distributional relationship impacting price level changes. The above implies Central Banks can get a deeper understanding of the Phillips curve relation if their monetary policy framework includes employment and growth targets.