Impact of Monetary Policy on Malaysian Economy

The assignment discusses the importance of setting benchmark interest rates for controlling inflation in the Malaysian economy, based on the experiences of neighboring economies. It also explores the role of banking and monetary policy in financing the transition to a low-carbon economy, and examines the relationship between exchange rate regimes and monetary policy autonomy in Malaysia. The document draws on research from various journals and sources, including the Bank Negara Malaysia's monetary policy framework, and provides evidence from firm-level investment studies and SVAR analyses.

Macroeconomics

Table of Contents
INTRODUCTION...........................................................................................................................1
Macroeconomics and its variables..........................................................................................1
Effects of monetary policy on Malaysia’s economic growth rate..........................................2
Effects of monetary policy on rate of unemployment in Malaysia........................................3
Recommendations to boast economic policy of Malaysia.....................................................4
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................7

INTRODUCTION
Macroeconomics is a branch of the economics field that studies how the aggregate economy
behaves. In accordance with this context, this assignment will cover the aspects of
macroeconomics and its variables. Further, the monetary policy of Malaysia will be discussed
and how it impacts on the national economy will be assessed in this report. Monetary policy
plays multiple role in the national economy of the country (Goh and McNown, 2015). In this
context, it impacts on unemployment rate in Malaysia will be covered in this report. Moreover,
recommendations and suggestions will be formulated after analysing the monetary policy on
which the government can boost the national economy of the country effectively and efficiently.
Macroeconomics and its variables.
The study of economics as a whole is termed as macroeconomics. The motive of
macroeconomics is to analyse the cyclical trends that rotates in the economic environment of
country (Karim and Azman-Saini, 2013). As compared to micro economics, the macroeconomics
covers the larger area and analyses the national economy growth rate, unemployment rates,
inflation rates and exchange rates. Macroeconomic events and the state of the economy affect all
members of society. Businesspeople forecasting the demand for their products and services
should anticipate how consumers’ incomes will grow. Pensioners and people living on fixed
incomes have concerns about potential price increases that could affect the cost of living.
Unemployed persons looking for jobs always hope that the economy will grow fast so that firms
will increase their labour force (Smets, 2014). The variables of Macroeconomics are gross
domestic product (GDP), Unemployment Rate, Inflation Rate and International trade. The
description of variables are provided below:
 Gross Domestic Product (GDP): The gross domestic product refers to the aggregate
value of products and services produced in a country during a year. It determines the
growth and productive level of the economy of the country effectively and efficiently.
For example the current gross domestic product value of Malaysia is $913.593 billion
(Karim and Karim, 2014).
 Unemployment Rate: The second most vital variable or component of macroeconomics
is the unemployment rate. Unemployment rate is measured in the country by comparing
number of people unemployed in the country by dividing them with total population.
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 Inflation Rate: It is an essential variable of macroeconomics. The overall increase in
level of prices measured by the consumer price index is known as inflation. Inflation is
one of the primary concerns of economists and policymakers because it imposes a variety
of costs on the economy (Banerjee, Devereux and Lombardo, 2016).
 International Trade: The major component of macroeconomics concerned with
international trade. International trade is the process of exchanging goods and services
outside the border of the country. It is further divided into two forms, which are import
and export. High rate of import leads to generation of low surplus and high rate of export
leads to generation of high surplus (Takáts and Vela, 2014).
Effects of monetary policy on Malaysia’s economic growth rate
Figure 1: Overnight Policy Rate
(Source: Monetary Policy of Malaysia, 2017)
The Bank Negara Malaysia (BNM) is accountable for maintaining and deciding the
monetary policy and rates. From the analysis it was identified that the current Overnight Policy
Rate (OPR) in 2016 was 3 percent. The national economy and growth rate has been affected by
the monetary policies. The statutory reserve requirement (SRR) was in the monetary policy of
2016 was 3.50 percent. After the announcement of the new monetary policy, the industry
production expanded a robust 6.8% in August annual terms, accelerating from 6.1% growth in
July (Campiglio, 2016). According to the analysis, it was found that due to greater impacts and
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growth in mining sector and monetary policy of the country, leads to growth and development of
the national economy effectively and efficiently. Further, it was identified that the Malaysian
market rising rapidly and achieving greater heights. The authorities contends that inflation rate in
the country is increasing day by day which impacts on the purchasing power of customers. Thus,
the monetary policy of the country focusing on reducing the inflation rate and improving the
growth rate of the country effectively and efficiently. As per International Monetary Fund, due to
effective monetary policies formulated by Bank Negara Malaysia, the economic growth rate
reaches to 4.8 per cent in 2017 (Mohanty, 2014). The increasing rate indicates that the country is
moving on the right path and right direction in order to increase their gross domestic product
value and reducing the inflation and unemployment rate effectively and efficiently.
It not only impacting the national economy of the country but also affective natives of
Malaysia (Shrestha and Semmler, 2015). Risks from external environment damaging the
emerging market of the country and thus, they are retreating from cross border integration and
international trade. This leads to lower export rates and higher deficit in the country. Thus,
government and financial management of the country needs to implement a strategy so that the
monetary policy of the country become more effective and efficient.
Effects of monetary policy on rate of unemployment in Malaysia
The deep concept of unemployment refers to the number of people who are willing to be
employed at prevailing wage rate, yet unable to capture the job opportunity (Pennings,
Ramayandi and Tang, 2015). For example, as per the analysis made in 2016, the unemployment
rate in Malaysia was around 3.45%.The unemployment in the country refers to the number of
skilled and competent people unable to acquire job and remained unemployed (Kamin, 2015).
Unemployment rates impacts on the national economy greatly. The unemployment rate provide
information about the economy spare capacity and unutilised resources. Below is the table that
provides the brief idea about the fluctuating unemployment rate in Malaysia:
Table 1: Unemployment Data of Malaysia
Type 2013 2014 2015 2016
Unemployment
Rate
3.1% 2.9%
(Unemployment
in Malaysia,
3.1% 3.5%
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2017)
From the above table it can be understood that unemployment rate was gradually increases
since 2014. As per the recent analysis it was identified that the unemployment rate in the country
is high i.e. 3.5% thus, resulting in degradation of national economy (Goh and McNown, 2015).
From the analysis, it was identified that the market economy and industries were affected by the
monetary policy of the country. The industries was unable to generate business and growth
opportunities and thus remain unable to provide employment effectively and efficiently. Further,
it was identified that the inflation rate in Malaysian economy was constantly increasing, thus,
reducing the purchasing power of people and lowering the national economy of the country. If
people and customers resist to purchase then industries and organisations has to reduce the
production level which directly impacts on employment. The Malaysian economy has performed
well over the past few years. Despite of frequent transformation of global environment, the
country’s economy remained resilient. Albeit, after unchanged in monetary policy of Malaysia,
the gross domestic product value has slowed down slightly. Thus, the monetary policy of the
country impacts on the growth rate and production value greatly. Government along with
financial expertise of the country needs an action plan on the basis of which they can reduce the
frequent rising of inflation rate in the country.
Organisation was forced to remove excessive manpower thus, results in increase in
unemployment rate in the country. Due to contraction of monetary policy in the country leads to
reduction of money in the national economy. This leads to increase in interest rates and lending
activities decreases simultaneously (Karim and Azman-Saini, 2013). This impacts on the
industries as demand for tools, machinery and equipment and other capital goods reduces
rapidly. In these conditions the unemployment rate increases as organisations needs to reduce
excessive manpower for sustainable growth. Thus, the monetary policy of the country needs to
be effective enough so that employment rate increases and unemployment rate reduces
simultaneously. Monetary policy refers to short term policy which is made for a year which
impacts on the national economy of Malaysia effectively and efficiently. Further, monetary
policy of the country impacts on inflation rate and which directly and indirectly impacts on
unemployment rate of the country. When the inflation rate is high, the real value of money
erodes. For example, as per research reports, the inflation rate in Malaysia measure in 2016 was
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around 2.09 percent. This impacts on the customer purchase power. If customer purchase less,
organisation manufacture less and thus, they require less manpower. Gross domestic product
value defines the sustainability of economy of the country and also indicates the growth and
development of national economy effectively and efficiently. Further it is a multi-dimensional
process of transformation which targets on betterment of the society, state or country with the
motive of producing more life sustaining necessities such as food shelter and clothing. From the
analysis of the monetary policy, it was identified that the gross domestic product value lowered
due to increase in unemployment in the country. The unemployment rate was affected by the
monetary policy of the country.
Recommendations to boast economic policy of Malaysia
From several years, the national economy of Malaysia showing great results and outcome.
Government of the country working diligently in order to protect the national economy of the
country as well as fulfilling basic amenities effectively and efficiently (Smets, 2014). Albeit,
from the analysis several loopholes has been discovered which leads to downgrade and depletion
of national economy. In order to cope up with those challenges and issues, below are the
suggestions and recommendations provided:
 In order to increase the production level and growth in the economy, government and
policy makers needs to concentrate on global market and money value of the country. In
depth analysis is required in order to understand and comprehend the global market
growth (Karim and Karim, 2014). This will not only increases new business opportunities
in the country, but also aid in growth and development of the country. This will promote
sustainable development in the country and hence, the national economy will be boast up
effectively and efficiently.
 Inflation rate in the country is rapidly increasing thus affecting the national economy of
the country. Monetary policies requires some transformation in interest rates so that flow
of money can be effectively controlled and monitored (Pennings, Ramayandi and Tang,
2015). This will impacts on the national economy of the country and business will be
blooms effectively and efficiently. Further, transformation in monetary policy will
impacts on the production and growth rate in industries established in Malaysia.
 Unemployment rate is comparatively high in Malaysia as more skilful and talented
people remains unemployed in the country. The government and financial authorities of
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the country needs to focus on expansion of money policy in the country (Takáts and Vela,
2014). This step will welcome new business in the market thus increasing growth and
productivity of the country effectively and efficiently. Further, this will also reduce the
unemployment rate in the country as more and more people will be provided with jobs
they deserve.
 The international trade activities has been greatly affected by the monetary policies. The
amount of cess and custom tax leads to decrease in exports and increase in imports in the
country (Banerjee, Devereux and Lombardo, 2016). It is recommended to the government
to analyse monetary policy and made subtle transformations that will aid in improvement
of import and export policy of the country.
 Increasing the supply of money in market is the best strategy which can assist the
economy in recovering from recession and decreasing growth.
 The Malaysian economy can attain growth objectives by reducing the negative impact of
regulations and policies.
 Increasing quantitative and qualitative investment by investing infrastructure, and tax
reforms can enhance the growth of Malaysian national economy.
 The economy can focus on increasing awareness about labour forces, quality education
system and optimum utilisation of resources is the best technique which can promote the
growth Malaysian economy.
 Strengthening the design of policies and regulations keeping in mind the business
environment of all industrial sectors is the best way which can help the economy in
boosting its productivity in order to attain growth.
Thus, by following and implementing these transformation in the monetary policy, the
country can improve their national economy and increase their growth rate simultaneously.
These recommendations will not only aid in controlling the inflation policy of the country but
also provides benchmark on which Malaysian national economy can achieve greater heights.
CONCLUSION
From the above report, it can be understood that macroeconomics refers to the study of
national economy as a whole. In this context, this report examines the national economy of
Malaysia. The variables of macroeconomics in context of Malaysian economy has been assessed
effectively and efficiently in this report. Further, the impacts of monetary policies on the growth
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and development has been assessed in this report effectively and efficiently. The impacts of
monetary policy on inflation and unemployment rates has been assessed in this report. This helps
in providing brief idea and concept of transforming national economy of the country. Apart from
this, the report analysed that the contraction of monetary policy led to reduction of money in the
national economy which led to increasing interests rates and decreased lending. Hence, the report
concluded by stating that for controlling inflation it is important for Malaysian economy to set
bench market according to its neighbourly economy in order to attain greater heights.
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REFERENCES
Books and Journals
Banerjee, R., Devereux, M. B., & Lombardo, G. (2016). Self-oriented monetary policy, global
financial markets and excess volatility of international capital flows. Journal of
International Money and Finance, 68, 275-297.
Campiglio, E. (2016). Beyond carbon pricing: The role of banking and monetary policy in
financing the transition to a low-carbon economy. Ecological Economics, 121, 220-230.
Goh, S. K., & McNown, R. (2015). Examining the exchange rate regime–monetary policy
autonomy nexus: Evidence from Malaysia. International Review of Economics &
Finance, 35, 292-303.
Kamin, S. (2015). Cross-border spillovers from monetary policy. presentation at the Peterson
Institute of International Economics, Washington, DC Based on joint research with John
Ammer, Christopher Erceg, and Michel De Pooter.
Karim, Z. A., & Azman-Saini, W. N. W. (2013). Firm-level investment and monetary policy in
Malaysia: do the interest rate and broad credit channels matter?. Journal of the Asia Pacific
Economy, 18(3), 396-412.
Karim, Z. A., & Karim, B. A. (2014). Interest rates targeting of monetary policy: an open
economy SVAR study of Malaysia. Gadjah Mada International Journal of
Business, 16(1), 1-22.
Mohanty, M. S. (2014). The transmission of unconventional monetary policy to the emerging
markets-An overview.
Pennings, S., Ramayandi, A., & Tang, H. C. (2015). The impact of monetary policy on financial
markets in small open economies: more or less effective during the global financial
crisis?. Journal of Macroeconomics, 44, 60-70.
Shrestha, P. K., & Semmler, W. (2015). Monetary Policy and International Reserves: Empirical
Evidence from East Asian Countries. International Journal of Finance &
Economics, 20(3), 191-205.
Smets, F. (2014). Financial stability and monetary policy: How closely
interlinked?. International Journal of Central Banking, 10(2), 263-300.
Takáts, E., & Vela, A. (2014). International monetary policy transmission.
Online
Monetary Policy of Malaysia. 2017 [Online]. Available through https://www.focus-
economics.com/countries/malaysia/news/monetary-policy/bnm-maintains-its-policy-rate-
unchanged-in-may> [Accessed on 4th November 2017].
Unemployment in Malaysia. 2017 [Online]. Available through:< https://www.focus-
economics.com/country-indicator/malaysia/unemployment> [Accessed on 4th November
2017].
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