| dc.description.abstract | This paper offers an insight on short-term effects of inflation
on unemployment level in Bosnia and Herzegovina (BiH).
The relationship is tested on country level as well as individually on the level of its entities: Federation of Bosnia and
Herzegovina, Republika Srpska, and Brcko District. ˇ
BiH has been chosen for this study because of its unique
monetary arrangement, that is, the currency board system
adopted in BiH, fixing its exchange rate to the Euro and
also due to the high unemployment rate that persists since
the independence of the country. This type of monetary
system results, of course, in a strong relationship with the
European monetary system as well as the European Central
Bank (ECB). The main goals of the ECB are to maintain price
stability in the EU, to achieve a low-level of unemployment
and to facilitate economic growth with low inflation. However, due to recent financial and economic events, mostly the
financial crisis in Greece, and possible financial breakdowns
in Spain and Italy, the commitment of the ECB to maintain
low inflation is challenged by required bailouts of the EU
member countries that face financial difficulties. Since Bosnia
and Herzegovina operates within a currency board regime
with its exchange rate fixed to the Euro, the inflation rate of BiH is expected to be a reflection of inflation in the EU
(the correlation between the monthly CPI of Bosnia and
Herzegovina and the EU amounts to 0.94, based on a data
sample of monthly CPI from April 2008 to June 2012). As a
result, any change in monetary policy of the European Union
(EU) might be a blessing or a curse for BiH, depending on the
country’s inflation-unemployment relation. If the relation is
negative, as proclaimed by supporters of the Phillips curve,
a possible increase in inflation might decrease the high level
of unemployment in the country which, at the end of 2012,
amounted to 45% and was one of the highest unemployment
levels in the world. However, if the inflation-unemployment
relationship is positive, a higher inflation rate in the EU
might indeed burden the economy of BiH further and as a
result even increase pressure on employment. This possible
negative long-term effect of inflation on unemployment
has been highlighted by Ahrens and Snower [1]. Moreover,
estimating the extent of wage rigidity in BiH is important
for understanding monetary policy transmission mechanism
between the Euro area and BiH and to analyze whether wage
curve mechanisms are also in force in post-war BiH. | en_US |
