In 1991 the Colombian authorities implemented the inflation target for the first time, at the time the central bank (Banco de la Republican, BR) and the government did not they had clear tasks regarding macroeconomic management and there was no authority to establish monetary policies. Therefore, the nature of inflation targeting and its operational significance were perplexing and received with little credibility (Gómez, Uribe, & Vargas, 2002). Unemployment in Colombia has one of the highest rates compared to the global and Latin American average. Although unemployment levels in Colombia have decreased over the period examined (1991 to 2015), there have been periods of high unemployment such as 1999 and 2000 with 20.1% and 20.5% of unemployed. There has been debate as to whether there is a relationship between unemployment and inflation and whether there is a trade-off between these two. Economist AW Phillips created the famous “Phillips Curve” which describes the inverse relationship between unemployment and inflation. However, economists such as Friedman and Phelps believed that in the long run the relationship between unemployment and inflation was non-existent (Razin and Yuen, 2002). This article attempts to estimate the relationship between inflation and unemployment in Colombia between 1991 and 2015 and in the short run; in 2015. Finally, this paper examines inflation targeting in Colombia since it was introduced in 1991 and the success it has had in reducing inflation through 2015. Say no to plagiarism. Get a tailor-made essay on "Why Violent Video Games Shouldn't Be Banned"? Get an Original Essay The following section will review relevant literature on the relationship between inflation and unemployment. To understand the relationship between these two variables, inflation, inflation targeting, Philips curve, and unemployment will be discussed. In simple terms, inflation is the increase in price levels in the economy. Businesses react to price levels in the economy. Therefore, if there is a substantial change in aggregate demand, firms will respond to the changes. If aggregate demand increases, firms will likely raise prices, and if demand is high they will push prices up to increase profits (Sloman, ). Inflation is measured by the increase in the price level and therefore by price indices. There are three main inflation indices: consumer price index (CPI) and GDP deflator, and producer price index (PPI) (Hubbard and O'Brien, 2007). CPI: is the main measure of inflation levels. It takes the consumption basket and services used by households, such as water and food, and measures changes in price levels. The prices of this index are weighted on a periodic quantity basis (Mankiw, 2007). In 2017, in the UK the Office for National Statistics introduced a new measure called consumer price inflation, including the cost of owner-occupier housing (CPIH) which acts as the CPI but is adjusted for average residential rents (Chu , 2017).PPI: Similar to the CPI, the PPI takes the basket of consumers and services to measure changes in price levels, but instead of household prices, the PPI takes the prices of household goods and services production of companies such as raw cotton and oil (Hubbard and O'Brien, 2007). GDP deflator: measures every final good and service produced in a country during a period of time, usually a year, using the ratio of nominal to real GDP (Hubbard and O'Brien, 2007). Since 1991 Colombia began to target inflation and between the years 1992 and 1999 monetary policy was introduced. However, the first inflation targets set were more in the form of a forecast than a policy objectivemonetary (Gómez, Uribe and Vargas, 2002). According to the law, the central bank (BR) must announce an inflation target that is lower than the inflation rate observed in the previous year. The legal framework used for price stability was introduced in the 1991 constitution and the central bank must comply with regulation to achieve price stability in Colombia (Gómez, Uribe, & Vargas, 2002). The unemployment or employment rate is measured by the labor force. The percentage of the workforce that is unemployed is called the unemployment rate. There are three main types of unemployment. Frictional, structural and cyclical unemployment (Hubbard and O'Brien, 2007). Frictional unemployment: refers to the time it takes an unemployed person to find a job. This unemployment is often short-lived as it is the process necessary for a worker to find a job. Structural unemployment: refers to the mismatch between the skills and abilities needed for the job and the person looking for a job. This unemployment is often long-term because new skills need to be learned and people need to be retrained. Cyclical Unemployment: This type of unemployment occurs due to economic downturns. When an economy enters a recession, companies must reduce production and lay off workers because they can't afford them. Various research has been conducted on the relationship between inflation and unemployment. In 1958, economist AW Phillips pioneered research into the relationship between these two macroeconomic variables. The Philips curve suggests that there is an inverse relationship between inflation and unemployment. Phillips demonstrated the alleged relationship with his research in the United Kingdom and observed that as aggregate demand increased, inflation levels rose but unemployment fell, and that wages rose rapidly in periods of low levels of unemployment while wages they increased slowly when there were periods of high levels of unemployment. unemployment (Singh and Verma, 2016). The curve has been a benchmark for politicians. Either they can lower unemployment levels, but at the cost of higher inflation, or they can decrease inflation levels, at the cost of high unemployment levels. However, further research since 1960 suggests that the trade-off between unemployment and inflation is limited (Sloman and Garratt, 2010). Therefore, the Phillips curve works under three assumptions: In the short run, there is a trade-off between inflation and unemployment. In the short run, stagflation can break the trade-off between inflation and unemployment. In the long run there is no trade-off between inflation and employment. Since then, many economists have studied this relationship and its accuracy. Research conducted by Mankiw (2001) suggests that monetary policy is very important as it influences unemployment and in turn influences inflation, so there is a trade-off. Mankiw believes that the Phillips curve is a good point of view, however, it fails to describe the dynamics of the relationship between unemployment and inflation since the Phillips curve does not take into account any theory of price adjustment. Alisa (2015) concluded that the Phillips curve provides important insights to policy makers. However, this means that policymakers must choose between higher unemployment or higher inflation as the Phillips curve suggests that price stability and full employment are unattainable in the short term. Furthermore, his research on the Russian Federation agrees with Friedman that the Phillips curve is only a short-term effect. Furthermore, the work of Slezarov (2012) shows that there is a strong relationship between unemployment and inflation in the.