The Short and Long Run Philips Curve with the Lucas Critique in Kenya

Abstract

The topic of the study was; The Short and Long Run Phillips Curve with the Lucas Critique in Kenya. This paper determined the Phillips curve in Kenya both in the short term and long-run. The non- accelerating inflation rate of unemployment was also estimated and the Lucas critique tested to proof whether it is evident in Kenya. This study was necessary in Kenya since the Kenyan rates of inflation and unemployment are both high simultaneously contrary to what Phillips curve theory explains. While using secondary type of data covering a period of 39 years from 1977 to 2015, causal type of research design was employed in this study as well as using Ordinary Least Squares method to estimate the short term (run) and long term (run) Phillips curve equations. Ordinary Least Squares method was also used to calculate the estimate of the non accelerating inflation rate of unemployment and by use of a special formula, NAIRU estimate was calculated. Eviews statistical software was used in data analysis. Both short and long run Phillips curve equations showed an insignificant negative relationship between inflation and unemployment. Also the estimated NAIRU in Kenya was found to be 8.699 percent. It was therefore concluded that the Lucas critique is evident in Kenya. It is therefore advisable that before any policy geared to bring a balance between inflation and unemployment is implemented in Kenya, Lucas‟ criticism should be taken into consideration. KEY TERMS: Inflation, Unemployment, Phillips curve, Lucas critique and the NAIRU