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The Role of Macroeconomic Fundamentals in Malaysian Post Recession Growth

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Recession and Its Aftermath

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Abstract

Before the currency crisis, Malaysia was considered the best “development success story” among the second-tier newly industrializing economies in East Asia. From 1987 to 1996, the Malaysian economy grew at an average annual rate of 9 %, several times faster than the economies of the USA and many other Western industrialized nations. The economy was virtually at full employment for the last 6 years before the crisis, with modest inflation, rapid export growth, manageable external debt, and improvement in current account deficits. However, this impressive growth changed dramatically with the onset of the currency crisis. Economic growth contracted in 1998. Nevertheless, the economy showed some recovery, with an economic growth rate of 3–4 % for 1999–2001. The Malaysian government has made much effort to help the economy recover, such as a monetary policy that aims to promote monetary stability and sufficient liquidity in the economy, keeping inflation rates low, and maintaining the exchange rate at a stable level owing to the pegging to the US dollar. The external sector also had a good surplus, and the stock market has performed steadily in the past several years. As a result, Malaysian real GDP grew at an accelerated pace of 6–8 % from 2003 to 2010. It is the aim of this study to find out the role of macroeconomic fundamentals in Malaysian postrecession growth. The macroeconomic variables selected are exports, imports, price level, money supply, interest rate, exchange rate, and government expenditure.

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Notes

  1. 1.

    1  Dickey and Fuller (1979, 1981)

  2. 2.

    2  Johansen and Juselius (1990, 1992)

  3. 3.

    3  The sample period was chosen as such for two reasons. First, Malaysia had pegged its exchange rate at RM 3.80 to the US dollar from 1 September 1998. Second, the Malaysian economy experienced contraction in 1998 and the economy had shown some recovery in 1999. Therefore, the third quarter of 1998 is an appropriate date to consider as a starting period for the post recession period.

  4. 4.

    4    This is to correct for bias toward finding evidence for co-integration in a finite or small sample.

  5. 5.

    5    The negative coefficient between money supply and economic growth tends to suggest that an increase in money supply would depress economic growth, which is contradictory to the theory; however, it is not statistically significant.

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  1. Department of Economics, Universiti Putra Malaysia, Serdang, Malaysia

    Lee Chin

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  1. , Economics, BB Ambedkar University, Rbly Road, Lucknow, 226025, Uttar Pradesh, India

    NMP Verma

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Chin, L. (2013). The Role of Macroeconomic Fundamentals in Malaysian Post Recession Growth. In: Verma, N. (eds) Recession and Its Aftermath. Springer, India. https://doi.org/10.1007/978-81-322-0532-6_6

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