The dynamic relationship between unemployment,  inflation, interest rate and economic growth

Asmawi Hashim

Abstract

The focal point of this study is the investigation of the dynamic relationship between selected macroeconomic variables, including unemployment, inflation, interest rate and economic growth, in Malaysia. In order to achieve the aims of thisstudy, quarterly time series data from the first quarter of 2001 until the fourth quarter of 2017 was utilised. The Johansen Juselius Co-integration test was used to investigate long run equilibrium in the equation system, and the Granger Causality test in Vector Error Correction framework was used to evaluate the long-term and short-term relationships between the study variables. The findings suggest that a relationship exists between the variables in the long term, including unemployment interest rate, inflation and economic growth across the system equations. The results further suggest that, in the short run, a two-way causality exists between unemployment and economic growth. Moreover, the results show that unemployment affects economic growth, both in the short and the longterm. By implication, this suggests the government should pay particular attention, in both the short and long term, to the unemployment rate, in order to bring this to a desirable level. In this respect unemployment can be reduced by enhancing employment opportunities throughout both governmental and private sectors of the country

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