Analysing the behavior of fiscal policy in Malaysia

SHARIFF UMAR SHARIFF ABD. KADIR and KASIM MD. MANSUR and Wong Hock Tsen and MOHAMAD ISA ABD JALIL and SUDDIN LADA and Joehan Joehari William and Ahmad Aizuddin Hamzah and SAMSULBAHRI MOHD NASIR (2025) Analysing the behavior of fiscal policy in Malaysia. Labuan E-Journal of Muamalat and Society (LJMS), 19 (1). pp. 166-177. ISSN 1985-482X (P-ISSN) , 2672-7390 (E-ISSN)

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Abstract

Malaysia’s fiscal position, as measured by its budget balance, has consistently recorded deficits since the 1997–1998 Asian Financial Crisis. This persistent trend of budgetary shortfalls has contributed to a rising government debt ratio, which has nearly reached the statutory limit. The Fiscal Theory of the Price Level (FTPL) posits that, in the absence of a fiscal policy response to escalating government debt, fiscal policy—rather than monetary policy—can serve as the anchor for price levels. This scenario implies a non-Ricardian fiscal regime. Against this backdrop, this research seeks to examine the behaviour of fiscal policy in Malaysia. The study employs both backward-looking and forward- looking analytical approaches, covering the period from 1980:Q1 to 2023:Q4. The findings indicate that Malaysia’s fiscal policy aligns with a Ricardian regime, wherein an increase in government debt prompts a corresponding rise in the primary surplus. Additionally, the analysis of impulse response functions reveals that a positive shock to the primary surplus results in a reduction in government debt. These outcomes suggest that fiscal policy in Malaysia does indeed respond to changes in government debt, thereby ensuring the sustainability of its fiscal framework.

Item Type:	Article
Keyword:	Fiscal policy, fiscal reaction function, ols, var model, Malaysia
Subjects:	H Social Sciences > HG Finance > HG1-9999 Finance > HG3691-3769 Credit. Debt. Loans Including credit institutions, credit instruments, consumer credit, bankruptcy H Social Sciences > HJ Public Finance > HJ9-9940 Public finance > HJ241-1620 By region or country
Department:	FACULTY > Labuan Faculty of International Finance
Depositing User:	JUNAINE JASNI -
Date Deposited:	29 Jul 2025 12:10
Last Modified:	29 Jul 2025 12:10
URI:	https://eprints.ums.edu.my/id/eprint/44682

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