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Impact of Fiscal and Monetary Policy on Unemployment in Malaysia: ARDL Approach

Author

Listed:
  • Dr Razida Hanem binti Mohd Radzil

    (Faculty of Business and Management, Universiti Teknologi MARA, 27600 Raub, Pahang)

  • IM. Hashim

    (Faculty of Business and Management, Universiti Teknologi MARA, 27600 Raub, Pahang)

  • R. Razlina

    (Faculty of Management and Informatic, Universiti Islam Pahang Sultan Ahmad Shah, 25150 Kuantan, Pahang)

Abstract

This study investigates the impact of proxy for fiscal and monetary policies on unemployment in Malaysia, utilizing annual time series data from 1995 to 2021. Employing an econometric approach, the research primarily focuses on diagnostic tests of a hypothesized unemployment model, including unit root tests, ARDL bounds testing for cointegration, and tests for heteroskedasticity and serial correlation. The Phillips-Perron (PP) unit root tests reveal that most variables exhibit stationarity at first difference, confirming their integration order. The ARDL Bounds Test indicates the presence of a long-run relationship among the variables, suggesting that fiscal and monetary policy instruments, alongside unemployment, are cointegrated over the long term. A key component of this analysis involves a regression of the squared residuals (RESID2) from a primary unemployment model, which serves as a diagnostic test for heteroskedasticity. The results from this regression show that lagged unemployment rates and lagged interest rates, as well as current government tax revenue and grants, significantly influence the variance of the unemployment model's residuals. Specifically, UNEMPRATE(-2) and IR(-2) exhibit significant coefficients, indicating that past unemployment and interest rate volatility contribute to the current volatility of the model's errors. The Breusch-Godfrey Serial Correlation LM Test further confirms the absence of serial correlation in the model. These findings underscore the complex interplay between macroeconomic policies and labor market stability in Malaysia, highlighting the importance of considering residual variance in policy formulation. The study concludes with policy implications for enhancing the effectiveness of fiscal and monetary measures in mitigating unemployment in Malaysia.

Suggested Citation

  • Dr Razida Hanem binti Mohd Radzil & IM. Hashim & R. Razlina, 2025. "Impact of Fiscal and Monetary Policy on Unemployment in Malaysia: ARDL Approach," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 9(9), pages 8040-8054, September.
    • Handle: RePEc:bcp:journl:v:9:y:2025:issue-9:p:8040-8054
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    References listed on IDEAS

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    1. Alan J. Auerbach & Yuriy Gorodnichenko, 2013. "Corrigendum: Measuring the Output Responses to Fiscal Policy," American Economic Journal: Economic Policy, American Economic Association, vol. 5(3), pages 320-322, August.
    2. M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
    3. Simon Sturn, 2011. "The Impact of Monetary Policy on Unemployment Hysteresis," Post-Print hal-00718701, HAL.
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