Journal of Finance and Economics, 2015, Vol. 3, No. 5, 77-85 Available online at http://pubs.sciepub.com/jfe/3/5/1 © Science and Education Publishing DOI:10.12691/jfe-3-5-1 Unemployment and Inflation: An Estimated Phillips Curve for Brazil (2002-2014) Gustavo Antonio Ponzoni, Julcemar Bruno Zilli * Department of Economics, Administration and Accounting Science, University of Passo Fundo, Passo Fundo/RS, Brazil *Corresponding author: jbzilli@upf.br Received July 03, 2015; Revised September 14, 2015; Accepted October 08, 2015 Abstract The relationship between inflation and unemployment has been discussed in different economic levels seeking an understanding of the interrelationships existing in the Brazilian economy and how the information is passed on and used by the decision makers. Thus, this study’s main objective is to analyze the ability of the Phillips curve to describe the dynamics of Brazilian inflation, using aggregate data from 2002 to 2014. After the estimated model it was possible to conclude that this can’t either be considered well adjusted, nor a full explanation to the Brazilian inflationary dynamics. It was also verified that the inflation expectation had greater impact on the formation of the current inflation than the past inflation. This increased weight of future inflation in the formation of the current inflation can be explained in terms, by the theory of rational expectations. The effects of an exchange rate shock remains having direct influence on the formation of internal prices and, as a consequence, on the inflation. Keywords: unemployment, inflation, Phillips, curve, tradeoff, Brazil Cite This Article: Gustavo Antonio Ponzoni, and Julcemar Bruno Zilli, “Unemployment and Inflation: An Estimated Phillips Curve for Brazil (2002-2014).” Journal of Finance and Economics, vol. 3, no. 5 (2015): 77-85. doi: 10.12691/jfe-3-5-1. 1. Introduction Economists dedicated to research in these areas try to understand how the components (level of growth or development; the labor market; purchasing power of the population; inflation; sustainable development; fiscal and monetary policies) behave individually and their interrelations with the other segments. Currently, another issue that has drawn the attention of Brazilians is the relationship between inflation rates above the established target with a low unemployment rate. Despite being widely used, this relationship had some contradictions in certain moments of history. Even with some adaptations, the way the variables (unemployment and inflation) relate varies differently for each country and in accordance with the time period observed [6]. A similar equation to the Phillips curves, but increased by expectations, is entitled in the economic literature as "New Keynesian Phillips Curve" or NKPC. In these models with prices that do not change immediately, there is a positive relationship between the inflation rate and the level of output and therefore a negative relationship between inflation rate and the unemployment rate [36]. In summary, despite the adjustments and the level of econometric complexity, Phillips curves aim to describe the inflation dynamics of a country. Therefore, does inflation have a dynamic relationship with the unemployment rate in Brazil? Thus, the hypothesis that there is a significant relationship between dynamic inflation and unemployment for Brazil is tested. The main objective is to analyze the ability of the Phillips curve to describe the Brazilian inflation dynamics, using aggregate data from 2002 to 2014. Specifically, we studied the national and international literature review regarding the Phillips curve and we verified the existence of trade-off in the short term between inflation and unemployment with aggregated indicators at a national level. The market economy has supported its growth in external and internal factors. As the government fully controls the external factors, it is its duty to provide a stable domestic environment that offers security for investments. Inflation has been a recurring theme in many analyses about the Brazilian economy. Inflationary experiences are indeed bad since the implementation of the Real Plan, Brazilian economy is undergoing a period of a greater stability and satisfactory average growth. The unemployment rate remains low, with full employment characteristics in some areas. Thus, this study is justified by the time of continuous low unemployment and persistently high inflation rate. Therefore, it is of real importance for both the academic society and the community at large, since a continuously high inflation significantly alters the stability of the economy. Regarding the academic society, the relevance is to seek empirical evidence for the negative correlation between inflation and unemployment in the system of a post-decree period of inflation targeting, using econometric tools. For the community at large, the importance lies in showing that the inflationary dynamics,