Inflation in Malaysia

Maintaining a low and stable inflation rate has become one of the challenges in the macroeconomic management of most countries. Among others, Malaysia has a very unique experience in terms of inflation. The economy has experienced episodes of high (1973‐1974, 1980‐1981) and low (1985‐1987) regimes of inflation, and was able to contain low and stable inflation during the high economic growth period of 1988‐1996. The objective of this study is to identify important factors that contribute significantly to inflation in Malaysia. This study also aimed to examine the possible existence of international and intra‐ASEAN inflation transmission to Malaysia. The analysis is carried out based on the time‐series approach of multivariate cointegration, vector error‐correction modeling, impulse response functions and variance decompositions. The empirical results of this study show that external factors such as exchange rate and the rest of ASEAN’s inflation are relatively more important than domestic factors in explaining Malaysian inflation.