The Role of the Central Bank in Stabilising Malaysia's Economy

Ooi, Covin (2023) The Role of the Central Bank in Stabilising Malaysia's Economy. Final Year Project (Bachelor), Tunku Abdul Rahman University of Management and Technology.

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Abstract

It is crucial for people, policymakers, and investors to know the impacts of changes in monetary policy on Malaysia’s economy and re-examination of central banks' capacity to stabilise the real economy. This can avoid the impact of fluctuations in the GDP growth rate on people's consumption. The main objective of this paper is to examine the long-run and short-run effects of monetary policy on Malaysia’s economy by using annual data from 1992 to 2022. This study used Malaysia's GDP growth rate as the dependent variable. The independent variables used in the study are inflation with consumer prices, lending interest rate, the official exchange rate (LCU per US$), total reserves (including gold, current US$), and crude oil price (Brent). The Autoregressive Distributed Lag (ARDL) approach and Error Correction Model based on ARDL were used to examine the cointegration between the variables. The results showed that GDP growth rates are significantly affected by monetary policy. This study reveals that inflation with consumer prices and crude oil prices have a positive relationship with GDP growth rate in the long-run. Conversely, lending interest rate, official exchange rate, and total reserves have a negative relationship with GDP growth rate in the long-run. Furthermore, this study found that the official exchange rate and crude oil prices have a positive relationship with the GDP growth rate in the short-run. On the other hand, inflation with consumer prices, total reserves, and crisis were found to be negatively related to the GDP growth rate in the short-run