Inflation–Unemployment Trade-offs in the Czech Republic vs. the European Union: Econometric Reassessment of the Phillips Curve

This thesis examines inflation–unemployment trade-offs in the Czech Republic and the Eu- ropean Union (EU) through an econometric reassessment of the Phillips curve. The main objective is to determine whether inflation remains systematically related to economic slack, whether this relationship differs between the Czech Republic and the EU aggregate, and whether the empirical relevance of the Phillips curve depends on the econometric specifica- tion used. The empirical analysis is based on harmonized quarterly Eurostat data on inflation, unem- ployment, real gross domestic product (GDP), and the real effective exchange rate (REER). Three complementary models are estimated separately for the Czech Republic and the Euro- pean Union: a benchmark static Phillips curve, a dynamic autoregressive distributed lag (ARDL) / error-correction (EC) Phillips curve model, and a restricted New Keynesian Phillips Curve (NKPC). Descriptive analysis is followed by econometric estimation using ordinary least squares, Newey–West robust standard errors, bounds testing in the ARDL framework, and instrumental variables with two-stage least squares (IV / 2SLS) robustness checks for the restricted NKPC. The results show that the empirical relevance of the Phillips curve is strongly model - depen- dent. The static benchmark model provides only weak support for a conventional inflation - unemployment trade-off, as the unemployment-gap effect disappears once inflation persis- tence is included. The ARDL / error-correction model reveals a significant short-run Phillips relationship in both economies and shows that the Czech Phillips curve becomes more pro- nounced once the extraordinary post-2021 inflation episode is explicitly controlled for. The restricted NKPC provides the strongest overall evidence, indicating that inflation persistence is a central determinant of inflation in both economies and that the output gap has a stable positive effect on inflation, while the REER gap is not a robust explanatory factor. The thesis concludes that the Phillips curve remains empirically relevant, but not in a sim- ple static form. Inflation dynamics in both the Czech Republic and the European Union are shaped primarily by persistence, while cyclical slack becomes visible mainly in dynamic and structural specifications. Compared with the EU aggregate, the Czech inflation process appears more volatile and more sensitive to extraordinary inflation shocks.