Oil and food prices in Malaysia: a nonlinear ARDL analysis

Mansor H Ibrahim

doi:10.1186/s40100-014-0020-3

Abstract

The present paper analyses the relations between food and oil prices for Malaysia using a nonlinear autoregressive distributed lags (NARDL) model. The bounds test of the NARDL specification suggests the presence of cointegration among the variables, which include the food price, oil price and real GDP. The estimated NARDL model affirms the presence of asymmetries in the food price behavior. Namely, in the long run, we find a significant relation between oil price increases and food price. Meanwhile, the long run relation between oil price reduction and the food price is absent. Furthermore, in the short run, only changes in the positive oil price exert significant influences on the food price inflation. With the absence of significant influence of oil price reduction on the food price both in the long run and in the short run, the role of market power in shaping the behavior of Malaysia’s food price is likely to be significant.

Highlights

The episodes of rising food prices witnessed in recent years, especially during 2007–2008 and 2010–2011, have stimulated extensive popular and academic discussions and placed governments on alert as to their socio-economic implicationsa
The oil price was relatively stable during the drastic depreciation of the ringgit in 1997–1998 when Malaysia suffered from the Asian financial crisis
Turning to our main theme, we note the asymmetric long run relation between the food price and oil price with the increase in oil price being significantly related to the food price while the reduction in oil price not

Summary

Introduction

The episodes of rising food prices witnessed in recent years, especially during 2007–2008 and 2010–2011, have stimulated extensive popular and academic discussions and placed governments on alert as to their socio-economic implicationsa. Over the span of more than 40 years from 1971 to 2012, Malaysia has experienced an annual average growth rate of 6.1%. After recording the average growth rate of 7.4% per year from 1971 to 1984, the real GDP contracted by slightly more than 1% in 1985. During 1987–2006, Malaysia witnessed miraculous growth performance registering the average growth rate of more than 8.5% per year. In 1998, Malaysia’s real GDP contracted by more than 7% after recording the growth rate of more than 7% in 1997. Despite recurring political and financial uncertainties since the Asian crisis with the latest global financial crisis being the notable example, Malaysia managed to record the average GDP growth rate of 5.0% during 1999–2012. The corresponding figure for the period 1986–2012 is 2.6%

Methods

Results

Conclusion