Assessing the mechanism of oil price fluctuation and fiscal policy response in the Malaysian economy

Research output: Contribution to journalArticle

Abstract

The present paper analyzes the effects of oil price fluctuation on the economy; and fiscal policy response to the Malaysian economy. The data are analyzed utilizing a co-integration test, variance decomposition (VDC) and impulse response function (IRF) analysis under the unrestricted vector autoregression (VAR) methodology. The empirical findings of this study suggest that, in the short run, the Malaysia economy benefits from higher oil prices, as oil price shocks positively affect oil revenue. However, the real GDP of Malaysia is vulnerable to oil price fluctuations in the short term horizon. Meanwhile, oil price hikes exhibit an increasing trend for both GDP and total subsidy in the long run. Also, the results confirm that the changes in world oil prices have a significant short term impact on total government expenditure. These confirm that that fiscal policy is the main mechanism channel that determines the degree to which oil price shocks affect the economy. The study suggests that the adoption of expansionary fiscal policies during oil price shocks can facilitate rapid economic growth in the long run, as long as stable and persistent economic policies exist within the macroeconomic framework.

Original languageEnglish
Pages (from-to)69-81
Number of pages13
JournalJurnal Ekonomi Malaysia
Volume47
Issue number2
Publication statusPublished - 01 Jan 2013

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Fiscal policy
Fluctuations
Oil prices
Policy responses
Oil price shocks
Malaysia
Cointegration test
Revenue
Vector autoregression
Methodology
Variance decomposition
Macroeconomics
Government expenditure
Impulse response function
Real GDP
Short-run
Economic growth
Economic policy
Oil
Subsidies

All Science Journal Classification (ASJC) codes

  • Economics, Econometrics and Finance(all)

Cite this

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Assessing the mechanism of oil price fluctuation and fiscal policy response in the Malaysian economy. / Mohamed Yusop, Nora Yusma.

In: Jurnal Ekonomi Malaysia, Vol. 47, No. 2, 01.01.2013, p. 69-81.

Research output: Contribution to journalArticle

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