Does Inflation Shape the Phillips Curve? Panel Evidence from the Next-11 Economies

This study re-examines the Phillips Curve in the Next-11 (N-11) economies using annual panel data for 1991–2024. Because unemployment rate is non-stationary while inflation is stationary, the trade-off is specified in terms of the change in unemployment within an expectations-augmented framework. The model also includes lagged inflation, output growth, foreign direct investment, broad money growth and exchange rate depreciation. Panel diagnostics reveal strong cross-sectional dependence, heteroskedasticity and serial correlation, so we estimate dynamic fixed-effects models with Driscoll–Kraay standard errors. For the panel as a whole, a one percentage point rise in unemployment lowers inflation by about 2 percentage points in the same year and inflation is highly persistent. The trade off, however, differs sharply by inflation regime. In high inflation economies (Egypt, Iran, Nigeria and Turkey), the short run slope is −2.72 and inflation is driven by money growth. In low inflation economies the slope is only −0.75 and not robust. But inflation responds mainly to exchange rate movements in these countries. An interaction model confirms that the difference between the two groups is statistically significant at the 1% level. The result holds with year effects with unemployment in levels and the exclusion of the COVID-19 years. The findings suggest that the inflation–unemployment trade off is high where inflation is high and monetary discipline is weak. Policymakers in the two groups should therefore set different priorities.