Policy on unemployment in recent years

Research background

The motivation is learning more social knowledge. With the outbreak of the COVID-19 pandemic, the
monetary policy was changed by government. And because employment is an important basis for
macroeconomic policy. Therefore, in the context of the epidemic, it is very meaningful to study the impact
of the new monetary policy on employment. And it can also predict the government's employment policy
through the change of employment. With the epidemic, the unemployment rate is growing. Although the
unemployment rate in some countries has returned to the prerecession level, others have not. Non
accelerated inflation rates (NAIRU) have also increased in these countries. In the past 10 years, the "evil"
macroeconomic variable known as unemployment has become one of the most important problems today,
because it has the ability to destroy the economy of a country. Because the impact of monetary policy on
unemployment has been proved by many studies, but few studies use Malaysia as the research object.
Therefore, the impact of Malaysia's monetary policy on unemployment is blank. Because Malaysia's
economy is heavily dependent on oil prices, Malaysia will be affected by external economy. This is very
similar to the economic form of the European countries studied before, so Malaysia is a good choice.

Research question

The issue of this study is the impact of Malaysia's monetary policy on the unemployment rate in the past
decade. In fact, as a developing country that has responded well to the epidemic, Malaysia has rarely
studied the implementation of its monetary policy and the unemployment rate in recent years. This is part
of the research blank, so this is used as a research question.

Qbjectives

The impact of Malaysia's monetary policy on unemployment in recent years is demonstrated through VAR
model. This proves that the impact of monetary policy on unemployment has still played a role in Malaysia
in recent years.

Brief literature review

As early as 2006, Berument had investigated the impact of unemployment on the economy. And his
research includes the impact of monetary policy on unemployment. In recent years, the interest margin in
Malaysia has been falling in a fluctuating manner, which shows that the Malaysian government has always
used a relatively tight monetary policy until the outbreak of the epidemic. At the beginning of the
epidemic, the expansionary monetary policies of various countries led to inflation, so governments will
adopt tightening monetary policies to deal with inflation. Therefore, Malaysia's monetary policy in the
future will also focus on tightening monetary policy.
According to the research of Christiano, Eichenbaum and Evans in 1996, through the analysis of various
quarterly macroeconomic variables (using the vector autoregression (VAR) model), it is proved that the
impact of tight monetary policy an increase in the unemployment rate and a decrease in the employment
rate. Similar to the study in 1996, Leeper, Sims and Zha used a series of monthly macroeconomic variables
of the United States from January 1960 to March 1996 to pass the VAR model. Similarly, the impact of
tight monetary policy will lead to an increase in the unemployment rate. There is a similar study. It was
discovered by Korenok and Radchenko in 2004 through a series of quarterly total economic variables from
June 1959 to September 2002 and the use of factor enhanced vector autoregression model (PFAVAR). It
was also the impact of tight monetary policy that led to the decline of employment level. In 2007, Ravn
and Simonelli used SVAR model to analyze a large number of data, such as employment rate and inflation
rate. The research and analysis of Ravn et al. show that the government's use of tight monetary policy will
increase the unemployment rate.
In 2007, the opposite research results also existed. Alexius and Holmlund also used the SVAR model for
research and analysis, and studied the relationship between Sweden's expansionary monetary policy and
unemployment through quarterly data on unemployment rate, foreign output gap, technology and
government deficit. The results of this study show that expansionary monetary policy has increased the
output gap and reduced the unemployment rate.
Altavilla and Ciccarelli (2007) studied the relationship between monetary policy and unemployment
through Bayesian model average program, interest rate, unemployment rate and other data. Therefore,
interest rate and unemployment rate are important data of this study, and most of the authors of this study
have used VAR model or SVAR model.
According to Shangle（2020) says Malaysia's economy as a whole, as well as most industries, benefited
from the rise in oil prices and suffered losses from the fall in oil prices. Both shocks lead to the
redistribution of resources and affect the financial sector of the economy.
Stoke Hammer and Stern (2012) investigated the impact of monetary policy and unemployment lag in
their research, and gave a quantitative explanation of the lag degree of 19 OECD countries.
Of course, there are different views. According to Loganathan et al., Malaysia's monetary policy has no
causal relationship with unemployment. However, Loganathan et al. tried to use structural and
cointegration empirical tests for the first time and mainly studied, and there may be errors in this study
because of the selection of variables.

Proposed research approach and the rationale

Table 1

According to the article on the relationship between inflation and unemployment in Malaysia, plus the
Malaysian government's very good performance during the epidemic. Therefore, as for the impact of
Malaysia's monetary policy on unemployment, most of the issues concerning monetary policy and
unemployment have chosen the VAR model, so this study will also use the VAR model; Because inflation
is related to unemployment, and inflation rate is also related to monetary policy, inflation rate is a good
choice of variables. Since the interest margin is the loan interest rate minus the deposit interest rate, it can
represent the change of Malaysia's national monetary policy. So the spread can be used as a variable. Next,
the total unemployment rate can be used as a representative variable of unemployment. Finally, the interest
payment under the current exchange rate is used as the fourth variable. Because the Malaysian government
is very dependent on oil, it should consider the international part related to oil. So these four variables are
interest margin, total unemployment rate and inflation rate related to consumer price. These three
endogenous variables, as well as the external variable of interest payment. This study uses VAR model to
analyze the impact of Malaysia's monetary policy on unemployment.
This research method will use the following five steps:
The first step: Check whether the four variables have unit roots. If there is no unit root, the VAR model
can be established directly. If the research variable has a unit root, it is not suitable to build a VAR model.
However, if there is a unit root and it satisfies the same single order integral, then the VAR model is
appropriate.
The second step：Use Johansen method for cointegration test after satisfying the unit root relationship.
The third step: After meeting the cointegration relationship, conduct VAR modeling. Use SPSSAU to
automatically select the VAR order, and combine the principle that the smaller the AIC/SC and other
information criteria are, the better, to find the best lag order, and then manually set the lag order.
The fourth step ：Check the stability of the model through AR characteristic root. Through Granger test,
further analysis of the correlation between variables.If there is a dynamic influence relationship between
variables, orthogonal impulse response is used. Granger test is used if the proportion between variables
needs to be explained. Residual autocorrelation is not considered in this study.
The fifth step: Finally, use the prediction data of SPSSAU.
Finally, the prediction data of the model can be obtained to meet the prediction purpose of the model.The
data of the four variables in Malaysia in recent 10 years are in Table 1, and the data source is WDI. Here
we can borrow the general formula of VAR model used by relevant researchers:
Yt=c+A1yt− 1+A2yt− 2+…+Apyt− p+Et
The formula is briefly explained below, where Y t is k × 1 column of vectors, which can represent the
function of its past value as the lag value and other variables. c is the constant kx1 vector, ai is the (K x K)
coefficient matrix, and ct is the K x 1 error term vector.
Using the above data and model formula, the research was conducted according to the above five research
steps, and finally the prediction results were obtained with the help of SPSSAU software. This result is
used to judge the research problems in Malaysia.

Execution plan on completing the research project

First, continue to search Malaysia's data and articles on monetary policy and unemployment through WDI
website and Google Academic website. The thesis is constantly revised by supplementing the latest
research data and articles. This will continue until the teacher gives feedback. After that, it will take one
month to revise the proposal based on the teacher's feedback. Then, according to the new outline, the first
draft will be completed in one month, of course, the data source is the WDI website. With the help of the
teacher's guidance, the paper was finally completed in one month.

Potential risks of the research project

The biggest potential risk of the project is that the VAR model may not fully describe exogenous variables.
The second potential risk is that the impact of Malaysia's monetary policy on unemployment is not as
obvious as that of other countries, leading to the failure of the VAR model. The third potential risk is that
the internal variable of interest margin cannot reflect Malaysia's monetary policy, while the variable of
interest payment is very risky. Although the interest payment data on the exchange rate can show the
impact of the US dollar on Petronas under certain conditions, it is actually controversial to use it as an
external impact variable, which is an innovation challenge and risk. Few people use this data to express the
impact of monetary policy on unemployment, because the correlation of interest payment is not very
direct. However, Malaysia's economy is greatly affected by the external world, so this variable that can
reflect the changes of the external environment is added.

Feasibility analysis

First of all, many studies show that monetary policy can have an impact on unemployment. Therefore,
Malaysia's monetary policy will also have an impact on unemployment in theory. And although the
research data include the epidemic period, the monetary policy only includes expansionary monetary
policy and tight monetary policy, which can be shown through the interest margin. At the same time, the
unemployment part can be shown by the total unemployment rate. Because inflation is closely related to
monetary policy and unemployment, inflation rate is also necessary.Finally, because Malaysia is very
dependent on the outside world, the interest payment on exchange rate is used to express the influence of
the outside world on Malaysia.
Because VAR model has been proved by many researchers to be effective in the study of monetary policy
on unemployment. So VAR model is feasible. At the same time, WDI website is the most reliable data
source that is easiest to find under the current research conditions. In fact, because similar studies have
been done in different countries, this study only applies Nigeria's research to Malaysia, and changes
several variables according to the actual situation in Malaysia. Therefore, the success rate of this study is
very high. In fact, all risks are controllable.If Malaysia's monetary policy has no impact on unemployment,
it means that the government can use monetary policy at will without worrying about the unemployment
rate.

Conclusion

In conclusion, it is very necessary to study whether Malaysia's monetary policy has an impact on
unemployment in recent years through realistic demand and a large number of research materials. Because
time series are used, VAR model is the best model to predict this result. Although there are risks due to
innovation, they can be controlled. This research is feasible and has great prospects.

Reference list
Alexius, A., & Holmlund, B. (2007). Monetary policy and swedish unemployment fluctuations (IZA
Discussion Paper No. 2933). Retrieved from http://ftp.iza.org/dp2933.pdf

Altavilla, C., & Ciccarelli, M. (2009). The effects of monetary policy on unemployment dynamics under
model uncertainty: Evidence from the US and the euro area (The European Central Bank Working Paper
Series No. 1089). Retrieved from https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1089.
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Berument, H., Dogan, N. & Tansel, A. (2006). Economic performance and unemployment: Evidence from
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Christiano, L. J., Eichenbaum, M., & Evans, C. L. (1996). The effects of monetary policy shocks:
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Korenok, O., & Radchenko, S. (2004). Monetary policy effect on the business cycle fluctuations: Output
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Shangle, A.，& Solaymani, S, （2020）. Responses of monetary policies to oil price changes in
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