The Impact of Oil Price Shock on Malaysia Real Gdp Growth

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The impact of oil price shock on Malaysia Real GDP Growth

Sumbang Ak Melai, Universiti Malaysia Sabah,
Financial Economics
Nur Muhamad Bakti Bin Haji Ishak, Universiti Malaysia Sabah, Financial Economics
Mohd Idris Bin Lawe, Universiti Malaysia Sabah,
Financial Economics

This paper empirically investigates, in the contexts of ADF test, co integration and granger causality test, the dynamic relationship between these two measures of oil prices shock and real GDP growth in Malaysia. Using yearly data for the Malaysia real GDP from (1970) and world oil price from (2007)

Keywords: GDP, Oil Price, ADF Unit Root Test, Cointegration Test and Granger Causality.


The aim of this paper is to investigate the impact of these variables on Malaysia GDP by using the most recent time series data and also reexamine the empirical link between oil price shocks and GDP, which has been well documented in the literature, to produce additional evidence. A growing body of literature has provided evidence on several features of empirical relationship between oil price shocks and GDP. These features have been emerged by a change in the pattern of oil price movements since the mid-1980s. There were lots of oil prices increases before the mid-1980s, and since then, there have been both increases and decreases in the price of oil. A brief review of related empirical investigations is provided as follows. Mork (1989) concluded that oil price increases had more impact on the economy than oil price decreases. Dotsey and Reid (1992) confirmed the Mork’s findings that oil price increases were more important than oil price decreases in affecting GDP.


Y=C+I+G+ Xn(Ex-Im)

The Consumption (C), Investment (I), Government Expenditure (G) and net Export (Ex-Im) is important in changes of GDP (Y). The changes of oil price will cause the government policy to increase the government spending. For example, in July 2008 where the oil price increase in sudden, government transfer the burden to Malaysian by decreasing the oil subsidies. This action is taking to make sure the government spending still function whether the oil price increase or not. Malaysia is a country doing export and import in oil industries. Malaysia has export their crude oil and then buy it again as oil good for national consumptions so that the increase in oil price does not have big affect to the Malaysia GDP. Increase in oil price will give positive and negative impact to Malaysia. Increase in net export will increase the GDP.


This study is important because the changes of oil prices will effect with Malaysia GDP. With this research we can predict the performance of Malaysia GDP impact by oil price shock. Beside that, its is useful for investor to make decision whether to invest in Malaysia or not. This research is useful for government to overcome this situation. As the Abel and Bernanke on july 2001 said “the increase in the oil price leads to an increase in the general price level, and for a given level of money supply, it reduces the real money supply. The short-term result is an increase in the real interest rate. Whether the consumers perceive the oil price shock as temporary or permanent also plays a role. If the shock is perceived to be temporary for example short-term effects larger than the long-run effects, consumers may attempt to smooth their consumption by borrowing more (or saving less), which again pushes the equilibrium real interest rate upwards. The monetary authority could counteract this by increasing the money supply, but it is unlikely to do so if the shock is only temporary”.


We make this research because nowadays, the oil price shock in floating situation. So to get more motivation we use data oil price and data Malaysia GDP to get the result. With this result, the researcher in the future can use as...
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