The Effects of Credit Supply Shocks on Malaysia's Economy

Abstract

This study has examined the impacts of credit supply shocks and other common economicshocks (aggregate demand & supply and monetary shocks) on Malaysia's macroeconomicvariables, using the Bayesian structural vector autoregressive (SVAR) model andemploying sign restrictions. The results showed that an expansionary credit supply shockpositively affected the Malaysian economy, consistent with the existing literature. Basedon the variance decomposition finding, credit supply shocks explained a significantportion of the anticipated variation in the GDP growth, inflation, and, most importantly,credit growth in Malaysia. This study further decomposed total private non-financialcorporate loans into two components: households and non-financial firms. Unlike othereconomies that have extensively researched this subject matter (US, UK, Euro Area), thegrowth rate of households and non-financial firms differed greatly in Malaysia. The empirical findings revealed considerable distinctions between these two components, indicating that different treatments or policy formulations are required rather than employing the same policy to boost or govern Malaysia's credit market.