Factors that Influence the Inflation Rate in Malaysia

Abstract

Maintaining a low and steady inflation rate has become one of the challenges in most nations.Many factors have contributed to Malaysia's inflation rate over the last few years, and it can be either economic or external factors.As only a few current studies have been discussed on this topic, this paper is primarily interested to examine the factors that affect the inflation rate in Malaysia from the year 1991 to 2020.The study also looks into whether the factors of inflation play a role in the changes in Malaysia's inflation rate.Hence, the independent variables that were chosen are economic growth (GDP), government expenditure (GE), exchange rate (ER) and unemployment rate (UNEMP), while the inflation rate (CPI) is the dependent variable.This paper utilized the Ordinary Least Squares (OLS) regression method to determine the significance of independent variables in causing inflation.The data for this study were collected during 30 years from the World Bank and Thomson Reuters DataStream.Overall, the results have found that ER, GE and UNEMP has a significant relationship with inflation in Malaysia.Interestingly, the study revealed that no significant relationship between economic growth and inflation during the period of study.Therefore, the outcome of this study implies that future research should employ the threshold model and Autoregressive Distributed Lag (ARDL) models approach to obtain accurate conclusions on the impacts of economic growth on inflation.In summary, this study will assist the policymaker and the government to control the inflation rate by tightening the monetary policy and implementing the fiscal policy.

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