A Bayesian Vector Autoregressive analysis of price and industrial shocks on the Malaysian economy

Abstract

Aside from identifying the determinants of economic growth, ensuring a stable evolution of output is crucial. This paper therefore, intends to shed light on the effects of consumer prices (CPI) and producer prices (PPI) as well as industrial output (IPI) shocks on real aggregate output. Preliminary examination of data suggests a critical analysis on the nexus between aforementioned variables is warranted. Conforming to precedence in the literature, Bayesian Vector Autoregressive analysis was performed on the detrended series. As expected, a shock in consumer prices induces a negative response in real GDP while a positive response was observed from a shock in producer prices. However, we note that the positive response from PPI is subdued which may be accounted for by the consideration of negative consumer sentiment in producers’ decision. Additionally, we find positive CPI response on shocks emanating from real GDP and IPI. We note that the weak CPI response from innovation in IPI may be due to the percentage of exported goods in the Malaysian manufacturing sector. Also noteworthy, is that innovations in CPI and real GDP induce positive response in IPI, but followed by mild negative response. We ascribe this observation to inventory overshooting.