ASYMMETRIC IMPACT OF EXCHANGE RATE AND OIL PRICE ON INFLATION IN MALAYSIA
Muhammad Harunurashid Thelatha
DOI:
Keywords:
low and middle-income, inflation, exchange rate, oil price, asymmetric, nonlinear autoregressive distributed lag
Abstract
The current study is intended to examine the asymmetric impact of exchange rate and oil price on inflation in Malaysia over the period between 2010 to 2020 by applying Nonlinear Autoregressive Distributed Lag (NARDL) approach. The results revealed the presence of long-run asymmetries among exchange rate, oil price and inflation. These findings also confirmed the atypical reaction of inflation to positive and negative shocks in exchange rate and oil price. Interestingly, the impact was found to be more significant when the exchange rate depreciated and oil price increased. Furthermore, findings also confirmed positive and significant association among the ratio of external debt over export and indirect tax per capita with inflation. The outcomes of the study have relevant implications for policymakers interested in the asymmetric relationship between exchange rate, oil price and inflation in Malaysia, mainly to protect the low and middle-income group in line with the 2030 Shared Prosperity Vision agenda. To manage inflation, relevant authorities should work towards a more effective market structure as well as the perspective related to consumerism and its relevance to addressing inflation. Eventually, proper controls can be placed to correct imperfections in the marketplace, especially collusion and cartels that erode fair pricing. At the same time, import inflation factors should be identified to weaken the pass-through effects from global to domestic market.
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