Impacts of oil price, exchange rate and inflation on the economic activity of Malaysia

• DOI: http://doi.org/10.1111/opec.12073
• Date: 01 June 2016
• Author: Mohammed Mahmoud Mantai,Fardous Alom
• Published date: 01 June 2016

Impacts of oil price, exchange rate and

inflation on the economic activity of

Malaysia

Mohammed Mahmoud Mantai* and Fardous Alom**

*Postgraduate student, Department of Finance, International Islamic University, Malaysia.

**Assistant Professor, Department of Economics, International Islamic University Malaysia, Kuala Lumpur,

50728, Malaysia.

Email: fardous@iium.edu.my; fardousalom@gmail.com

Abstract

The purpose of this study is to examine the short and long-run impacts of crude oil price (CP),

exchange rate (EXR) and inflation (CPI) on the economic activity (GDP) of Malaysia within the

framework of the vector error correction model (VECM). The results suggest that CP positively

affects GDP in the short-run and the tests do not identify any significant impacts of EXR and CPI

on the GDP. However, all these variables maintain a long-run relationship with GDP. The causality

tests have shown unidirectional Granger causality that run from CP to GDP and not from EXR and

CPI to GDP. The findings of this study are expected to provide insights for practitioners and policy

makers to understand the impacts of the CP shocks and its spillovers in the economic activity of

Malaysia.

1. Introduction

Beginning with the CP shocks of the 1970s, a large number of academic studies have

been conducted as an attempt to reveal the causes and impacts of CP shocks to the GDP.

Although Bohi (1991) has questioned the role of the CP shocks on the two subsequent

recessions of 1974 and 1979, Hamilton (1983), however, in his seminal paper, has

investigated the impact of CP shocks on the United States’economy since World War II

and has found seven of the eight post-war recessions since 1972 are preceeded by a

major increases of CP. Nevertheless, in analyzing the case of Japan of the CP shocks of

the 1970s, 1980s and 1990s onwards, Jim

enez-Rodr



ıguez and S

anchez (2012) have

found an evidence in terms of a falling industrial production and higher CPI in the 1970s

and 1980s whereas a limited industrial downturn and almost negligible inflationary

effects in the 1990s onwards. Another study of the macroeconomic responses to the CP

changes has been conducted in seven of the Organization of Economic Co-operation and

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