Phillips Curve Re-evaluation: The Case of Trinidad and Tobago Pre- and Post-COVID-19 Pandemic

This study undertook a comparative analysis by examining the theoretical relationship between unemployment and inflation for Trinidad and Tobago taking into consideration the impacts of the COVID-19 pandemic. Initial analysis showed a unique result that goes against the Phillips curve theory, which states that there is an inverse relationship between unemployment and inflation. Rather, the results demonstrated that the theory of an inverse relationship between unemployment and inflation did not hold during the COVID-19 pandemic in Trinidad and Tobago. With quarterly data for Trinidad and Tobago for the period 1991 through 2021, the block-wise Granger causality test concluded that there was a one-directional relationship between inflation and unemployment. The Granger causality test indicated that the consumer price index is a leading indicator of unemployment levels in Trinidad and Tobago and the unemployment rate is not a leading indicator of the consumer price index. Further analysis established that there exists a long-run relationship between consumer price index and the unemployment rate in Trinidad and Tobago. Finally, based on the impulse response function for the country, it was determined that the log of the consumer price index (LCPI) had a more influential impact on the log of unemployment (LUNEMP) over the 10-year period. All results established that the Phillips inverse relationship between unemployment and inflation did not hold for Trinidad and Tobago during the pandemic.