Phillips Curve in Self-management Socialism of Yugoslavia

Inflation and unemployment were two of the main issues that plagued the Socialist Federal Republic of Yugoslavia (SFRY) from 1965 to her disintegration. Economic history has taught us that uncontrolled inflation is a characteristic of the countries with a lack of democracy but SFRY was more economically liberal and decentralized than any other communist country. Using the World Bank annual data from 1965 to 1990 for unemployment and inflation, the OLS (Ordinary Least Squares) findings demonstrate that unemployment is significant and positively affects the inflation rate, which stands against the theoretical paradigms known as the Phillips curve. The impulse response function (IRF) indicates that the positive shock of unemployment positively affects inflation in the short run. The Johansen test reports that unemployment and inflation were integrated into the short-run confirming the expectations-augmented Phillips curve. Moreover, contrary to theoretical expectations is the co-integration in the long run where the relationship between inflation and unemployment rate turned into an upward steeper slope. To this end, the results help the scholars to be informed on the historical relationship between inflation and unemployment in the context of SFRY, a formerly communist country with a differentiated economic model. The relevance of our findings goes beyond economic concepts by understanding them as one of the main factors contributing to the bloody disintegration of the SFRY.