Abstract
This study examines the determination of inflation in Malaysia. The results of the generalised forecast error variance decomposition show that real import price change is the most important factor in the determination of inflation. The impact of real oil price change on inflation is marginal. An increase in real oil price has a more significant impact on inflation than a decrease in real oil price. The results of the generalised impulse response function show the impact of variables examined on inflation is relatively short. There is evidence that real oil price change Granger causes inflation.
Highlights
Malaysia achieved a relatively high and rapid economic growth over the past decades
The results of the DF and PP unit root test statistics showed that all the variables, namely inflation, real budget deficit, real money supply, real exchange rate, real import price, financial development, and real oil price, are non-stationary in level but becoming stationary after taking the first differences, except real Gross Domestic Product (GDP), real interest rate, and real import price
An increase in real GDP, real budget deficit, real money supply, real interest rate, real import price, financial development, or real oil price will lead to an increase in inflation
Summary
Malaysia achieved a relatively high and rapid economic growth over the past decades. In the 1970 1979 period, the average economic growth rate was 7.67% per annum. The average economic growth rate per annum was about the same, that is, 5.46%, 6.53%, and 4.91% over the 1980–1989, 1990–1999, and 2000–2005 periods, respectively. In the 1980–1989, 1990–1999, and 2000–2005 periods, the average inflation per annum was 3.45%, 3.53%, and 1.67%, respectively (Table 1). Inflation was high in Malaysia whilst economic growth rate was low. High inflation and low economic growth rate happened in Malaysia during world oil price increase in the 1980–1981 period. In the 1997–1998 period, Malaysia suffered from the Asian financial crisis, where inflation was relatively high whilst economic growth rate was relatively low. The experience of Malaysia achieved relatively low inflation and high economic growth could be an example for other developing countries
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