Exact prediction of inflation and unemployment in Canada

Potential links between inflation and unemployment in Canada have been examined. No consistent Phillips curve has been found likely due to strong changes in monetary policy of the Bank of Canada. However, there were two distinct periods where linear links between inflation and unemployment could exist - before 1983 and after 1983. A linear and lagged relationship between inflation, unemployment and labor force has been obtained for Canada. Similar relationships were reported previously for the USA, Japan, France and Austria. Changes in labor force level are simultaneously reflected in unemployment and lead inflation by two years. Therefore this generalized relationship provides a two-year ahead natural prediction of inflation based on current estimates of labor force level and unemployment rate. The goodness-of-fit for the relationship is of 0.7 for the period since 1965, i.e. including the periods of high inflation and disinflation.