Assessing the Impact of Oil Prices on the Malaysian Economy

The impact of oil prices on the macroeconomy has long been a topic of interest to economic researchers. In this paper, we analyze the impact of oil prices on Malaysia’s real economic activity, inflation, fiscal sector, and financial variables, such as stock prices and the currency market. The results of our study suggest that Malaysia’s potential growth tends to be lower during periods of significantly lower oil prices. Also, every USD1 increase in Brent oil prices is associated with an increase in real GDP of approximately MYR 646 million, an increase in CPI levels of 0.03, and an increase in annual fiscal revenues of around MYR 339 million. Furthermore, a percent increase in oil prices also results in a 0.04 percent increase in the stock market index and 0.03 percent appreciation of the ringgit the next day. We also find significant volatility persistence in, and inter-sector volatility spillovers between, the oil, stock, and foreign exchange markets. Going forward, Malaysia can increase its resilience to oil price movements by further diversifying its economy, its exports, and its fiscal revenue base.

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