FACTORS THAT AFFECTS THE CHANGES OF INFLATION IN THE US DURING THE PERIOD OF 1966 – 2012

FOREIGN TRADE UNIVERSITY FACULITY OF INTERNATIONAL ECONOMICS -*** - MID-TERM ECONOMETRICS REPORT TOPIC FACTORS THAT AFFECTS THE CHANGES OF INFLATION IN THE US DURING THE PERIOD OF 1966 – 2012 INSTRUCTOR : Dr Chu Thị Mai Phương Dr Vũ Thị Phương Mai CLASS : KTEE310 (2.1/2021).1 MEMBER : Hoàng Ngọc Anh – 1913340005 Nguyễn Đức Cường – 1913340012 Vũ Trường Sơn – 1913340034 Hanoi, December 2020 Table of Contents THEOREOTICAL BASIS OF THE RESEARCH TOPIC 1.1 1.1.1 1.1.2 1.1.3 1.2 The relationship between inflation, wages and unemployment In short-term Long term Conclusion The relationship between inflation and CPI MODEL SPECIFICATION TESTING THE INFLUENCE OF UNEMPLOYMENT, CPI, AVERAGE WEEKY EARNINGS ON INFLATION OF UNITED STATE DURING 1966-2012 2.1 2.1.1 2.1.2 Method to derive the model Method to collect and analyze the data 2.2 Population Regression Model 2.3 Explanation of variables 2.4 Description of the data 10 2.4.1 2.4.2 2.4.3 Methodology in the study Data sources 10 Statistical description of the variables 10 Correlation matrix between variables 11 ESTIMATED MODEL AND STATISTICAL INFERENCE 13 3.1 Estimated model and estimated result 13 3.2 Testing the level of relevance of the model 14 3.3 Testing the hypothetical violations 15 3.3.1 3.3.2 3.3.3 3.3.4 3.3.5 3.4 3.4.1 3.4.2 3.4.3 3.5 3.5.1 3.5.2 Testing Omit variable Ramsey Reset 15 Testing Multicollinearity 15 Heteroscedasticity 17 Testing autocorrelation 17 Testing normality of residual 19 Testing an individual regression coefficient 20 Testing the CPI 20 Testing the UNEMP 20 Testing the WGGR 20 Final result and Discussion 22 Final regression model 22 Discussion 22 CONCLUSION AND POLICY IMPLICATION 24 REFERENCES 25 FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012 FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012 ABSTRACT In recent years, on social media, there has been a country that are “famous for” the word Inflation – Venezuela From one of the wealthiest country on earth, with inflation, Venezuela is immersed in poverty, violence and illness So is inflation really a problem for the economy? According to economists and the prestigious website Investopedia.com, Inflation is the decline of purchasing power of a given currency over time More specifically, a quantitative estimate of the rate at which the decline in purchasing power occurs can be reflected in the increase of an average price level of a basket of selected goods and services in an economy over some period of time We need to clearly understand that the increase of the average price level here is the general increase of goods and services, not just a particular kind of good When the value of goods increases, it means that the purchasing power of money decline So that with the same amount of money, customers now can buy less than before Moreover, in case of relationship with other economies, inflation can be defined as the devaluation of a currency compared to others However, the devaluation of the money doesn’t always mean that inflation has negative impacts on the economy Otherwise, the negative influences of inflation only occur when the governments are unable to control the increase intensity of it In this case, when inflation is not measured and adjusted, it can lead to many negative impacts on the national economy and even affect other economies For example: trade balance instability, push costs, shoe-leather costs or hoarding wealth Conversely, if inflation is only moderate, it will cause the labor market to reach equilibrium faster, ensuring discount rates and rediscounts in the money and money markets main At the same time, moderate inflation also helps goods and services markets avoid the jagged pattern of price fluctuations In fact, in addition to the above three factors, there are also many factors affecting the inflation rate (based on Consumer price index - CPI) According to Keynes, besides the Consumer price index - CPI, cost-push or adaptive expectation are also two factors FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012 FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012 leading to inflation As for push costs, it can be simply understood that: When a government cuts taxes or increases recurrent consumption spending, budget deficits and currency devaluation that incur inflation taxes will increase the cost of raw materials Then, the increasing cost of raw materials leads to the bankruptcy of businesses, reducing total supply (potential output) Along with adaptive expectations, inflation is understood as the inherent state of the economy If workers try to keep their wages at the price (above the inflation rate), firms will pass on this higher cost of labor to the customer - through an increase in the prices of goods and services This leads to a loop of repeating, causing inflation However, when building the model, we find that three factors: Consumer price index, Unemployment rate, and Percent change in average weekly earnings greatly affect the changes of inflation rate According to William Philips, there is an inverse relationship between the unemployment rate and inflation, through the intermediate factor is the level of food That means if the unemployment rate is low, the economy must create more jobs, businesses expand production and total output increases That also means accepting high inflation and vice versa Therefore, we choose inflation and the factors affecting inflation (Consumer price index - CPI, Unemployment rate, Percent change in average weekly earnings) as the topic for our econometrics report FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012 FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012 THEOREOTICAL BASIS OF THE RESEARCH TOPIC 1.1 The relationship between inflation, wages and unemployment The relationship between these three quantities is a two-way relationship and the study focuses on the effects of wages on inflation and unemployment The author admits that it is impossible to have a perfect relationship between two quantities (one quantity is only affected by the other and vice versa) There are many factors other than wages that influence inflation but certainly the rate of change in wages has a strong effect on inflation In addition, the author does not deny the impact of unemployment on inflation, but it is a two-way relationship and both are affected by many other factors 1.1.1 In short-term A.W.Phillips was one of the first economists to seek to demonstrate a negative correlation between inflation and unemployment Philips has studied extensively on the relationship between the inflation rate and the UK unemployment rate for almost a century (from 1861 to 1957) Eventually he discovered that there was a trade-off between the two The trade-off of unemployment for wages His assumption is that the demand for resources increases, labor becomes scarce, businesses will quickly offer higher wages to attract workers However, when the demand for resources decreases and unemployment increases, workers will be reluctant to accept a salary lower than what they deserve So the rate of wage growth will gradually decrease The trade-off of wages to unemployment The second problem that affects the change in wage growth rate is the change in the unemployment rate When the economy thrives, businesses reap great profits, they are willing to pay generous wages in hiring labor This greatly increases the labor supply, FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012 FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012 and the unemployment rate then dropped rapidly On the contrary, when the business is not doing well, the salary of employees does not increase or increase very slowly, the demand for labor decreases, the unemployment rate becomes highly The above assumption by Phillips describes a non-linear relationship between unemployment and wage inflation The curves that form the relationship between the unemployment rate and the overall rate of price inflation (or rather wage inflation) have made the Phillips curve famous The wage inflation data Phillips uses can also be descriptive for general price inflation Because wages are also year in the production costs of the business Raising wages will result in the price of goods and services, and this is also the most basic definition of inflation 1.1.2 Long term In the late 1960s, a group of economists representing the money major, typically Milton Friedman and Edmund Phelps, gave sharp analysis and criticism that the Phillips curve could not be applied in the long run term In the long run, unemployment will return The natural adjustment mechanism of the market will return unemployment, this period is called by Paul Samuelson in the period of stagflation In the short term, wage increases will attract more workers At this point, the supply of labor will become plentiful, leading to the unemployment rate starting to decline However, workers will gradually find that their wage purchasing power is reduced due to inflation, and they will offer a higher salary to keep wages up to date The supply of labor thus began to narrow while wage inflation and general price inflation continued to rise, or even faster than before Increasing inflation to reduce unemployment is, in the long run, not conducive to the economy Similarly, reducing the inflation rate does not cause the unemployment rate to rise Since inflation does not affect the long-run unemployment rate, the Phillips curve becomes a vertical line when it intersects the horizontal axis at the value of the natural unemployment rate FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012 7.220 0.0072 (Source: the team synthesized under the support of Stata software) We can see that Prob > chi2 = 0.0072 <  = 0.05 → Reject H0 → At the 5% significant level, the model has autocorrelation • Correcting Autocorrelation To fix the problem, using Robust Use the command “reg infl cpi unemp wggr, robust”, we receive the table below: Table Regression model using robust standard errors F(3,43) = 10.04 P – value (>F) = 0.0000 R2 = 54.86% Variables Coefficient Standard T P > |t| Confident interval (95%) Error cpi -0.0089905 0.0040094 -2.24 0.030 -0.0170761 -0.0009049 unemp 0.2129014 0.1544124 1.38 0.175 -0.0985009 0.5243037 wggr 0.9014218 0.2386446 3.78 0.000 0.4201492 1.382694 constant 0.4568732 1.405421 0.33 0.747 -2.377428 3.291174 (Source: the team synthesized under the support of Stata software) Note that comparing the results with the earlier regression, none of the coefficient estimates changed, but the standard errors and hence the t values are different, which gives reasonable more accurate p values 18 FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012 FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012 3.3.5 Testing normality of residual In statistics, normality tests are used to determine if a data set is well-modeled by a normal distribution and to compute how likely it is for a random variable underlying the data set to be normally distributed Given that the hypothesis is: {H0: The model has normality H1: The model does not have normality} → May normally distributed Use the command “sktest r”, we receive the table below: Table 10 Testing normality of residual Variable Obs Pr(Skewness) Pr(Kurtosis) Adj chi292) Prob>chi2 r 47 0.0976 0.0103 8.11 0.0174 (Source: the team synthesized under the support of Stata software) We see: P-value = 0.0174 <  = 0.05 → Reject H0 19 FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012 FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012 → At the 5% significant level, the model has normality 3.4 Testing an individual regression coefficient 3.4.1 Testing the CPI With the significance level of 5%, we conduct the test: Given that the hypothesis is: {H0: 2 = H1 : 2  0} From Table 1, we have p-value = 0.030 <  = 0.05 → Reject H0 → The coefficient 2 is statistically significant at the 5% significance level → The Consumer Price Index has effect on the inflation rate 3.4.2 Testing the UNEMP With the significance level of 5%, we conduct the test: Given that the hypothesis is: {H0: 3 = H1 : 3  0} From Table 1, we have p-value = 0.234 >  = 0.05 → Not reject H0 → The coefficient 3 is not statistically significant at the 5% significance level → The Civillian Unemployment Rate has no effect on the inflation rate 3.4.3 Testing the WGGR With the significance level of 5%, we conduct the test: Given that the hypothesis is: {H0: 4 = H1 : 4  0} From Table 1, we have p-value = 0.000 <  = 0.05 → Reject H0 → The coefficient 4 is statistically significant at the 5% significance level → The Percent change in average weekly earnings has effect on the inflation rate 20 FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012 FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012 Meanings of estimated coefficients: Regression coefficient Sign of reression Meaning coefficient 2 = -0.0089905 0 Estimation of 3, on the condition that the other elements are constant, when UNEMP increases unit, INFL will increase 0.2129014 4 = 0.9014218 >0 Estimation of 4, on the condition that the other elements are constant, when WGGR increases unit, INFL will increase 0.9014218 21 FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012 FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012 3.5 Final result and Discussion 3.5.1 Final regression model INFL= 0.4568732 - 0.0089905*CPI + 0.2129014*UNEMP + 0.9014218 *WGGR 3.5.2 Discussion Based on the regression model and testing hypothesis, we can get a conclusion: • On the condition that the other elements are constant, when WGGR increases unit, INFL will increase 0.9014218 • On the condition that the other elements are constant, when CPI increases unit, INFL will increase 0.0089905 • The change in Unemployment rate does not affect the Inflation rate • The model explains 54,86% the change of Inflation rate The estimation and testing hypothesis shows that the unemployment rate is not meaningful in model or has no impact on the inflation rate This is not reasonable with the theory of the economist William Phillips with the argument that “inflation rate and unemployment have negative relationship” and be illustrated by the Phillips curve This contradictory happens due to further researches have proved that there is no tradeoff between inflation and unemployment in long-run, the arguments of Phillips just show the effect in short-run Specifically, In the last 1960s, a group of economists typical Milton Friedman and Edmund Phelps did some researches and separate The Long-run Phillips curve and The Short-run Phillips curve 22 FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012 FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012 According to this, in the short-run, raising wage will attract more labor, which make the labor force increases and more plentiful, since reduces the unemployment rate However, paying high wages means that the operation cost of company increase hence the price of product also goes up to ensure the profit During period, employees will recognize that their purchasing power decline and they will require employers to pay even higher salary, if not they are willing to be unemployed to look for a higher-paid job, so the unemployment rate increases In the long-run, the expected inflation rate will come near to the real one, at the same time the unemployment rate will back the natural one In conclusion, some policies which increase inflation rate to decline unemployment rate are just effective in shortrun In long-run, the unemployment rate is unchanged at the natural rate 23 FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012 FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012 CONCLUSION AND POLICY IMPLICATION Our team has just researched factors affecting inflation rate based on the theories of A.W.Phillips, Milton Friedman and Edmund Phelps After testing, we can see that the model which is built based on the data set 2-3 of Ramanathan has several hypothetical violations such as Heteroskedasticity and Autocorrelation They are fixed by robust and Prais-Winsten respectively However, we cannot conclude that this is the suitable model since the number of observations is really small (Obs: 47) Beside, we can realize that the unemployment rate does not affect much on inflation rate After the World War II, many countries deep into the condition that both inflation and unemployment rate are high However, unemployment rate is a signal of the recession or stagnation of the economy That is when the total product and demand for goods & services decreases, firms decide to reduce manufacturing Obviously, the stagnation period is not correlative to the theory about negative relationship between inflation and unemployment rate Since these disadvantages, our team conclude: This model still have some contraints and may not reflect the most objective evaluations about the effect of cpi, unemployment rate, average weekly wage on the inflation rate However, by using regression model and testing hypothesis, we partly understand the way how the politicians evaluate the inflation rate When inflation rate increases rapidly and lasts for a long time, it will make a lot of consequences, affect deeply to the life of households and the growth of economy Since that, to reduce and restrict inflation, we need not only immediate solution but also the long-term strategy 24 FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012 FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012FACTORS.THAT.AFFECTS.THE.CHANGES.OF.INFLATION.IN.THE.US.DURING.THE.PERIOD.OF.1966.–.2012