Abstract
This paper investigates the asymmetric oil price impact on inflation in Malaysia. The oil price asymmetric effect on inflation is examined using the Nonlinear Autoregressive Distributed Lag (NARDL) approach. The approach simultaneously tests the short run and long run nonlinearities of the oil price through positive and negative partial sum decompositions. The results showed that there is evidence of long-run and short-run asymmetry indicating that inflation reacts differently during an increase and a decrease in oil prices after the fuel subsidy rationalisation. Furthermore, the impact of an increase in oil prices on inflation is greater than the decrease in oil prices. Thus, understanding the asymmetric oil price inflationary effect will help policymakers in implementing appropriate policies to accommodate the asymmetry. Future research needs to investigate other possible factors with the asymmetric effect such as exchange rates.
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