Implementation of the Expectation–Augmented Phillip’s Trade-off to Create an Inflation Path that Minimize Social’s Loss Function: Evidence from Indonesia

Abstract The Phillip’s curve shows the trade-off between inflation and unemployment. The problem of unemployment so far echoes inferior to inflation rate. This study aims to prove the existence of the Philips curve in Indonesia and implement the Expectation–augmented Phillips trade-off to build an inflation rate path that minimizes Social’s Loss. In creating the inflation path, this study adopts the social's loss function model by Taylor. The results show that Indonesia's Phillips curve did exist from 1976 to 1996. However, it no longer exists during the next period, 2000 to 2022. Implementation of the Expectation–augmented Phillips trade-off results that based on the actual inflation rate at the end of 2022 of 6 percent, the yearly inflation rate should be at 4.79, 3.98, or 3,64 percent. Meanwhile, based on the inflation target in the fiscal note 2023, the yearly inflation rate should be 2.39, 1.99, or 1.82 percent. JEL Classification Code: E31, E37, E53