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Topic 1

Examining the nexus of inflation-growth: The case of Malaysia

Intro:

Low inflation and high economic growth are the two main policy objects targetted by many  policymakers. However, both objectives might not achievable at once due to the adverse relationship between inflation-growth. Both theoretical debates and empirical contractory results lead to inconclussive results. In this study, we explore the topic focused in disaggregated data of Malaysia.

Objective:

The main objectives include:

i. To examine the two-way inflation-growth nexus across CPI sectors of Malaysia

ii. To apply Markov-switching models to study the nonlinear two-way nexus of inflationgrowth under a two-regime models (high inflation versus low inflation regimes).

iii. To identify other determinants contributing to economic growth

iv. To study the behavior of growth and inflation of Malaysia

The scope

The data of CPI and GDP can be collected from the Statistics Department of Malaysia. The sectors of CPI include:

i. Total CPI
ii. Food
iii. Gross rent, fuel and power
iv. Transport and communications

Other main possible determinants to inflation-growth include: exchange rate, export, FDI etc.

Methodology:

The Markov-switching regression will be applied which consist of two types: MSAR and MSDR

The relationship to be examined:

i. CPI = F(GDP, X)
ii. GDP = F(CPI, X)

Here CPI consists of 4 series; X is other possible factors

Contribution:

This study has few contributions:

i. It applies the disaggregated data of CPI which is seldom found in previous studies. This enables deeper information to be revealed on the inflation-growth nexus

ii. It applies the nonlinear regression of MS models which enables results to be interpreted under high versus low regimes, the probability transition across regimes and also the expected duration in each regime.

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