Abstract. This paper is an attempt to investigate the existence of long run dynamics between inflation and unemployment in Hungary through a structured cointegration approach and vector error correction model. Using the monthly data of inflation and unemployment in Hungary, this study shows the presence of a long-term relationship between inflation and unemployment. The cointegration test results prove the existence of a long run dynamics between these variables and the vector error correction model depicts that the variables would adjust to long run equilibrium path quickly in case of short run disturbances to the model. The results stand in contrast with the cases of many of the developed countries like USA where recent studies proved that the long run relationships between these two variables are vanishing.

Keywords: inflation, unemployment, cointegration, vector error correction model, Philips curve.