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                                             Org.nr: ​2021002916 
         
         
        The relationship between inflation and 
               unemployment in Sweden. 
                                                      
         
                      A Bachelor Thesis on Economics 
                              by 
                        Edvin Sköld & Kaleb Tesfay 
                         Mälardalen University 
         
         
         
         
         
         
         
         
         
         
                                   Bachelor thesis in Economics 15 credits 
                                           Course code:​ NAA305 
                                         Supervisor: ​Johan Lindén 
                                   Examinator:​ Christos Papahristodoulou 
                                            Semester: ​VT/2020 
         
                    
                   Abstract:  
                    
                   Purpose:​ This thesis has the purpose to investigate what the Phillips curve looks like after 
                   the inflation target was introduced in Sweden after 1993 and to show that the relationship still 
                   applies and to estimate the slope of the curve. 
                    
                   Theory:​ Theory around the classical model of the Phillips curve, both articles who confirm 
                   the Phillips curve and articles that criticize the Phillips curve. Literature study of a number of 
                   studies around the Phillips model as a forecasting method, focusing on Sweden. The Phillips 
                   curve is a theory of there being a negative relationship between inflation and unemployment. 
                    
                   Method: ​The analyses is built upon regressions performed in excel to create a scatter plot 
                   graph with the purpose of illustrating the relationship between the selected variables. That is 
                   to create a Phillips curve and determine whether it hold true or not in Sweden during the 
                   selected time-series of 1996-2019. The data used in the thesis is collected from numerous 
                   websites, such as Riksbanken, SCB, Kantar sifo prosperas and konjunkturinstitutet.  
                    
                   Result:​ The thesis proves the validity of the Phillips curve in Sweden during the time-series 
                   between 1996-2019. From the three regressions conducted in the thesis all show a negative 
                   relation which coincide with Phillips theory. The thesis also found the clockwise loop 
                   causation in the conducted regressions, which proves the theory William Phillips the man 
                   behind the curve built upon the Phillips curve. The study shows macroeconomic theories that 
                   the Phillips curve can be used as forecasting method for monetary policy makers. 
                    
                   We found in our main regression that if; 
                       -    unemployment increases by one percentage point, inflation will fall by -0,2231 
                            percentage points according to the estimated Philip curve. 
                       -    Inflation expectations increases by one percentage point, real inflation will rise by 
                            1,3436 percentage points according to the estimated Philip curve. 
                    
                                       
                    
                 
                1. Introduction                                                                                    1 
                    1.1 Purpose                                                                                    2 
                    1.2 Limitations                                                                                2 
                    1.3 Choice of subject                                                                          2 
                    1.4 Disposition                                                                                3 
                    1.5 Background                                                                                 3 
                2. Theoretical frame of reference                                                                  5 
                    2.1 Theories                                                                                   5 
                        2.1.1 Unemployment                                                                         5 
                        2.1.2 Inflation                                                                            6 
                        2.1.3 Phillips curve                                                                       8 
                        2.1.4 Friedman & Phelps                                                                   10 
                        2.1.5 Robert Lucas, surprising the economy.                                               12 
                3. Method                                                                                         15 
                    3.1 Regressions                                                                               15 
                4. Data collection                                                                                16 
                    4.1 Unemployment                                                                              17 
                    4.2 Inflation                                                                                 17 
                    4.3 Inflation expectations                                                                    18 
                5. Results                                                                                        19 
                    5.1 Results from regressions                                                                  19 
                    5.2 The causation movement of inflation and unemployment                                      22 
                6. Discussion                                                                                     26 
                7. Conclusion                                                                                     30 
                8. Litterature                                                                                    31 
                    8.1. Data links:                                                                              33 
                 
                 
                 
                 
                 
                 
        
       1. Introduction 
       Inflation and unemployment has been studied by economists for almost 100 years, one of the 
       earliest paper to discuss this relationship was by Irving Fisher (62, 1926). However, it was 
       not until 1958 when A. W. Phillips’s paper brought interest to the subject. Not far behind, 
       two similar papers were written about the subject by L. A. Dick-Mireaux and J. C. R. Dow 
       (49, 1959) and the other by Robert J. Ball and Lawrence R. Klein (115, 1959). Then why was 
       Phillips paper the one that brought most attention? There are mainly three reasons to why the 
       other two papers were slightly ignored. Firstly, Phillips paper was released earlier than the 
       two other, secondly, Phillips paper was extended by Richard Lipsey (127, 1960). Lastly and 
       arguably most important, Phillips was the one that introduced the acknowledged curve that 
       his name bears.  
        
       Phillips curve is a tool used in national economics which model was first introduced during 
       1960s. The model describes a negative relationship between inflation and unemployment. 
       The last few decades the model has been the tool used by monetary policy makers to forecast 
       inflation and determine monetary policy (Karlsson & Österholm, 2018b). In theory there is a 
       relationship between inflation and unemployment in the Phillips curve, where high inflation 
       results in low unemployment, the same is valid for high unemployment resulting in low 
       inflation Phillips (1958). In an economy such as Sweden, there is an ambition to keep 
       inflation and unemployment at a low and stable levels, these are general monetary policy 
       aims for the global economy Gottfries (2013).  
        
       In Sweden, the central bank (Riksbanken) is the responsible entity to maintain the monetary 
       value through monetary policy measures, by stabilizing the general price rise which 
       contributes to economic growth and development. This is done by controlling the price rise 
       on products and services, since high inflation and insecurities in the economy stagnates 
       economic activities such as investments which takes damage from increasing capital costs 
       (Sveriges Riksbank 2018a; Sveriges Riksbank 2018b). Price Stability is maintained by the 
       central bank to create expectations in the economy with clear and credible aims for future 
       inflation. Monetary policy works best in an open economy with a floating exchange rate in 
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