THE IMPACT OF OIL PRICE SHOCKS ON THE MALAYSIAN ECONOMY
Keywords:
Oil price shock, DynamicEffect, Fiscal Policy Response, Volatility; MalaysiaAbstract
The purpose of this paper is to analyze the symmetric effect of oil price shocks on the Malaysia’s
economy. Annual data for the oil prices, real GDP, oil revenue, non-oil revenue, government total
expenditure and total subsidy variables are applied .The co-integration test; impulse response
function;variance decomposition analysis, under VAR methodology, are employed. The findings
suggest that in the short run, Malaysia economy is benefitted from oil price shocks as it has
positively affectedthe oil revenue, even in a short-term phenomenon and seem to retard in a long
run growth. In longer time path, oil price shocks exhibit an increasing manner for both GDP and
total subsidy. Also, the results confirmed that the fluctuations of world oil price would have a
significant short term impact on total government expenditure. These would confirm that that
fiscal policy is the main mechanism channel that transmits the oil price shocks to the economy.
Also, the results suggest that the adoption of expansionary fiscal policy during the oil price
shocks can facilitate rapid economic growth in the longer time path, as long as there is a stability
and persistence of economic policies within the framework.
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