The Effectiveness of Monetary Policy in Controlling Inflation in Malaysia

Chin, Ivy Hen Ling (2025) The Effectiveness of Monetary Policy in Controlling Inflation in Malaysia. Final Year Project (Bachelor), Tunku Abdul Rahman University of Management and Technology.

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Abstract

This study investigates the effectiveness of monetary policy in controlling inflation in Malaysia using annual data from 1974 to 2023. It examines the short-run and long-run relationships between inflation and key macroeconomic indicators including the exchange rate, real interest rates, GDP per capita, and oil prices. To achieve this, the study employs the Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) unit root tests, the Autoregressive Distributed Lag (ARDL) bounds testing approach and several diagnostic tests to ensure model reliability. Findings confirm a long-run cointegration among the variables, but individual long-run effects of monetary tools like interest and exchange rates are statistically insignificant. In contrast, GDP and exchange rates significantly influence inflation in the short run, while interest rates show delayed effects. Diagnostic tests validate the model’s reliability and stability. Overall, the results suggest that monetary policy in Malaysia has stronger short-term than long-term impacts on inflation, emphasizing the need for complementary structural and fiscal policies for sustained price stability.