Is There a New Phillips Curve for Malaysia?

The Phillips curve (advanced by A.W. Phillips in 1958) is the inverse relationship between inflation and unemployment – as unemployment decreases, inflation increases.

In this graph, an economy can either experience 3% employment at the cost of 6% inflation, or increase unemployment to 5% to bring down inflation level to 2%.

Two researchers from USM (Chor Foon Tang, Hooi Hooi Lean), concluded in their article in the Malaysian Journal of Economic Studies (Dec 2007) that for the sample period of 1970 to 2005, the trade-off Phillips curve is “alive and well in Malaysia”.

Fumitaka Furuoka (2007) of UMS in “Does the Phillips Curve Really Exist? New Empirical Evidence from Malaysia”, Economics Bulletin, Vol 5, No. 16 pp 1-14, concluded that “there existed the cointegrating relationship – as well as casual relationship between relationship between inflation rate and unemployment rates in Malaysia”.

Nevertheless, the accuracy of the Phillips curve has been questioned by many sane economists. It is probably nothing to do with the curve but the more complex economy we face. Consumer credit at peak levels has flattened consumer spending, causing a low inflation environment (but not deflation), decoupling perhaps unemployment and interest rates. In Malaysia, with a decline in disposable incomes as a result of high household debt levels inflation is tepid at best. In an economy where technology has taken jobs and debt levels impact inflation, there is more than the casual impact of inflation and unemployment. Perhaps, a New Phillips Curve could be established.

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