The effect of fiscal and monetary policies, trade openness and balance of payment on the total output in Malaysia
Abstract
Following the 1997-98 financial crisis in Malaysian economy, policy analyst and academic researchers were questioning the effectiveness of fiscal and monetary policy in managing the crisis. The literature is yet to agree on the issue concerning the appropriate monetary and fiscal measures, particularly with respect to the question of whether or not monetary or fiscal policy tools are more effective in managing total output during a period of financial crisis. Majority of the comprehensive theoretical frameworks are fragmented and tested mostly in developed countries. Only limited number of studies were conducted in developing nations. In view of the existing gaps from the literature and to develop a solid empirical framework, this study examined the effectiveness of fiscal and monetary policies, trade openness and the balance of payment on the total output in Malaysia using annual data from 1985 to 2016. By employing the multiple regression model, the study divides the regression model into fiscal model, monetary model and international trade model. The fiscal model shows that all fiscal variables are positive and significant, and it is more effective than monetary policy and international trade policy in managing the total output. For the monetary model and the international trade model, all variables are positive and significant except balance of payment. The impact of 1997-98 financial crisis also revealed a positive impact in fiscal model but negative effect on total output using the monetary model, though the p-values remain insignificant in both models. The overall findings established that fiscal policy is more effective compared to monetary policy in encouraging the total output during the study period. Therefore, government should ensure proper implementation of fiscal programs in order to realize the desired output growth in the long-run.