The Impact of Political Stability on Capital Flow : Evidence from Malaysia

Yap, Aik Shen (2024) The Impact of Political Stability on Capital Flow : Evidence from Malaysia. Final Year Project (Bachelor), Tunku Abdul Rahman University of Management and Technology.

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Abstract

This paper investigates the impact of political stability on capital flow in Malaysia, analyzing both short-run and long-run relationships with control variables such as inflation, market size, and exchange rate using annual data from 2002 to 2022. Employing methodologies like ARDL, Granger Causality tests, and impulse response tests, the study finds that political stability significantly influences capital flow in the long run but not in the short run. Conversely, market size positively affects capital flow in the short run but not in the long run, while inflation shows an insignificant negative long-term relationship with capital flow. Unidirectional causality is identified from inflation to capital flow, from capital flow to exchange rate, and from market size to capital flow. The impulse response tests indicate weak responses of capital flow to shocks in exchange rate and market size, but significant responses to shocks in political stability and inflation. Policy recommendations include enhancing regulatory quality, establishing a robust rule of law, reducing long-term inflation, boosting consumer purchasing power, improving business credit access, and maintaining a stable exchange rate environment to attract foreign capital flows.