Forman Christian College ( A chartered university )

Department: Economics
Title of term paper: Impact of monetary policy on unemployment rate
Name : Waleed Nadeem Butt
Roll number: 13-10010
Section: A
Course: Econ 413



Abstract
Of all measures that affect the health of the economy, the unemployment rate receives the most
attention from workers and elected officials. During economic recessions , elected officials face
constant pressure from constituents to do something about the unemployment rate. This
sometimes results in pressure applied to central banks to adjust monetary policy in a way that
lowers unemployment levels. Although monetary policy can affect the labor market , its impacts
are only direct.
Keywords: Monetary policy, unemployment rate, inflation and economic recession.

Introduction
Unemployment in Pakistan have increased to 6.50 percent in the fourth quarter of 2012 from
6.10 percent in the third quarter of 2012. Unemployment rate in Pakistan is reported by the
Pakistan Bureau of statistics. Historically, from 1985 until 2012, Pakistan unemployment rate
averaged 5.38 percent reaching an all time high of 7.80 percent in June of 2002 and a record low
of 3.10 percent in December of 1987. The importance of monetary policy that how it affect the
unemployment rate is a very serious issue because monetary policy by the federal reserve system
directly affects the money supply and access to credit but only indirectly affects the labor market
.Restrictive monetary policy , for example could dampen economic growth and force firms to lay
off workers, raising the unemployment rate . An increase in money supply by federal bank can
lead to wage and price inflation, negating the effects of monetary stimulus .

The objectives of the research paper are the following:
1- To observe that how monetary policy affects unemployment rate.
2- To observe the unemployment rate in Pakistan from Jan 2006 to Jan 2012.
3- To observe that how monetary policy affects inflation.
Literature review:
The article written by Engelbert Stockhammer and Simon Sturn investigates the hypothesis that
the extent to which hysteresis occurs in the aftermath of recessions depends on monetary policy
reactions. The degree of hysteresis is explained econometrically by the extent of monetary easing
the during a recession and by standard variables for labor market institutions in a pooled cross
country analysis using quarterly data. The sample includes 40 recessions in 19 organizations for
economic cooperation and development countries for which the required data is available. The
time period lasts for the period from 1980 to 2007. This article builds on Ball 1999 and extends
the sample of countries, the time period under the investigation and set of control variables.
An article written by Donal t. Bash on What is the role of Monetary policy Where does the
unemployment fit in? . Donal t bash describes the pressures on the monetary authorities on the
recent trends in the unemployment rate he says that over the most period during which we were
reducing inflation, the newzeland economy experienced a recession in activity. That reflected not
only the influence of disinflation but also the adjustment pressures caused by the microeconomic
reform on a scale unprecedented in the OECD in the last four decades. Since the passage of the
reserve bank act in 1989, indeed since late 1984, there has been no attempt by any government to
influence the implementation must have been strong. In late 1990, for example just before a
general election , the bank felt it necessary to firm monetary conditions to ensure a continued
progress toward the price stability goal in the face of an expansionary fiscal stance . Im sure that
no government wants that just before an election. Under a clause in the act, the government has
the power to direct the bank to focus monetary policy on some objective other than price
stability. However, that instruction has to be in public and most circumstances that make it
politically unattractive.
Another article written by Madeline Zadvodny and Tao Zha on monetary policy and racial
unemployment rates in which they examined the exogenous shifts in monetary policy have
different effects on blacks than on the total labor force. The model used the indicates that the
black unemployment rate does respond slightly differently than the overall unemployment rate to
exogenous changes in the federal funds rate and in other macroeconomic variables. Although the
timing and persistence of the differences vary across variables, few of these differences are large
in magnitude, particularly when viewed relative to the actual values use of two series. The
examination of the conduct of monetary policy during the 1980s and 1990s suggest s that
movements in the monetary policy not explained by the movement of other variables in the
model had larger effects on the back unemployment rate than on the overall unemployment rate.
The literature compares the unemployment patterns among blacks to the rest of the labor force
suggests that differences in educational attainment, experience , and racial discrimination may
play a role in differences in the two series. Future research should examine further why black
unemployment rates appear to show different cyclical responses than the overall unemployment
rate.


Data and methodology:
The data which I have collected is secondary data first I collected the trends of unemployment
rate in Pakistan from June of 2002 to June of 2012 , it is from the site tradingeconomics.com
.Now the second data which I have collected is macro model which shows the weaker
relationship between unemployment and monetary policy Riksbank macro model. Third data
which I have collected is from various sources which show the impact of monetary policy on
inflation.
All the data which I have collected the graphs of them are shown in the appendices.
Results:
The results shows that the unemployment rate has increased to 6.50 percent in 2012 from 6.10
percent in the mid of 2012. Pakistan unemployment rate is recorded high in June 2002 which is
7.80 percent and a recorded low which is 3.10 percent in December of 1987. The chart of it is
shown in appendix.
When the economy is in expansionary phase employments levels are higher and inflation is low
and when the economy is in contractionary phase inflation is high and employment rate is low so
to changes in monetary policy that maintain economic stability and minimize inflation tend to
keep unemployment low. The Riksbank macro model result showed that by tightening monetary
policy to control the inflation which is higher the effect of monetary policy will be greater if
people readjust their expectations than monetary policy affect will be greater on the real wages.
Our final results which is taken from economic synopses site shows that the increase in monetary
base affects the interest rates and increases the prices and causes inflation, so higher prices and
inflation is not suitable for higher output and employment, inflation reduces the demand for
money and, hence, hinders trade and the probability of matches in both the goods and labor
markets.
Conclusions:
According to ur conclusion there exist a positive relationship between the inflation and
unemployment rate. Therefore, the Riksbank macro model for the impact of monetary policy on
unemployment rate is are not valid, if the new interest rate policy affects expectations of future
monetary policy, and thus price and wage formation, than the calculated effect of monetary
policy on the employment could very well be weaker. Thus the expansionary monetary policy
will cause inflation and as a result of it will cause more unemployment .
Pakistan unemployment rate is recorded high in June 2002 which is 7.80 percent and a recorded
low which is 3.10 percent in December of 1987. The chart of it is shown in appendix.

References:
1- http://www.riksbank.se/Documents/Rapporter/Ekonomiska_kommentarer/2013/rap_ek_k
om_nr01_130305_eng.pdf
2- http://www.kc.frb.org/Publicat/econrev/PDF/1q95brsh.pdf
3- http://www.tradingeconomics.com/pakistan/unemployment-rate
4- http://www.ehow.com/about_5076330_effects-monetary-policy.html


Appendices: