Monetary Policy Inclusive Growth: Empirical Evidence from Malaysia

The static growth of foreign direct investment since 2006 and current growth per capita of 3.11% in 2015 about 4.89% in 1980 spark a growing interest in the role of monetary policy. The unexplored causal relationship between monetary policy, unemployment, foreign direct investment and economic growth in Malaysia represents a zone of the request, as it could spell issues for these countries in their arrangement in accomplishing growth per capita. This study plan to examine the dynamic relationship between monetary policy and economic growth for Malaysia during 1980-2015. It contended that presence of the structural break in the data generating process prompts to size distortion and false conclusion in the ADF model (Perron, 1989 and Lee and Strazicich, 2003). Henceforth, this study begins with testing for stationarity properties which consider structural breaks notwithstanding the conventional ADF test. We agree with the monetarist that changes in the money supply do not affect real variables over the long haul as no evidence of causality from inflation to output nor any causality from money supply to price level from this study. Instead of the money supply, results from VAR Granger Causality found that interest rate observed to granger caused growth per capita, money supply, inflation, unemployment and foreign direct investment. This study demonstrates that changing approach of monetary policy in Malaysia from monetary targeting to interest rates targeting, in fact, a fruitful execution. We found evidence of bidirectional causality between unemployment and growth per capita in this study also in line with Mohd Noor et al., (2007). Here, we propose that Malaysia needs to elevate foreign direct investment in term of expanding growth per capita as upheld by the result of VAR granger causality where foreign direct investment found to granger caused unemployment and growth.