Analysis of the Relationship Between Inflation and Unemployment in Indonesia through the Modern Phillips Curve Approach

This study aims to examine the existence of the trade-off phenomenon in the Phillips curve in Indonesia using the Generalized Method of Moments (GMM) approach. The analysis was carried out on secondary data which included the inflation rate, unemployment rate, potential output, and output gap. The results of the study show that the trade-off in the Phillips curve actually occurs in Indonesia, although its behavior has changed over time along with the dynamics of the national economic structure. The pattern of Phillips curve formation shows significant differences between the pre- and post-crisis periods. Before the crisis, the effect of the output gap on inflation tended to be moderate with inflation expectations formed in a balanced manner between the backward looking and forward looking approaches. However, after the crisis, the output gap pressure on inflation increased and inflation expectations were more dominated by a forward-looking approach.