VECM APPROACH OF MALAYSIA'S OIL PRICE RESILIENCE ON GROWTH

Abstract

Abstract: Malaysia, as an oil-dependent economy, is greatly affected by any worldwide fluctuations in oil prices. As such, revenues gained from oil are imperative to maintain Malaysia’s fiscal stability and boost its economic performance. Thus, this article explores the dynamic relationships between oil prices, macroeconomic variables, namely real effective exchange rates (REER) and consumer price index (CPI), and economic growth via Vector Error Correction Model (VECM) approach. Moreover, this study employs monthly time series data from January 2014 until August 2024. The analysis results show the short run and long run effects of the mentioned independent variables on Malaysian economic growth. In the short run, both oil prices and CPI prove to have two-way relationship with economic growth. Meanwhile, REER seem to have one-way relationship with economic growth. In addition, all variables significantly influence Malaysian economic growth. Heavily reliance on oil, Malaysia’s economy is vulnerable to the oil prices fluctuations. Indirectly, this study also offers an insight on energy economics. Hence, necessary economic diversification and actions are needed to reduce Malaysian economic vulnerability.