VAR Model: The Economic Indicators and the Inflation in Malaysia

Inflation is the dominant enemy for the cost of living. Meanwhile, cost of living is a sensitive issue for rakyat and also focused by the government. Nowadays, implementation of Sales and Service Tax (SST), decreasing the Overnight Policy Rate (OPR), fuel price and fuel subsidy issue and fluctuation of Ringgit Malaysia had been worried will increase the cost of living in Malaysia. This paper is investigating the relationship between the inflation with the interest rate, money supply and the exchange rate in Malaysia. As the model is not cointegrated, the Vector Autoregression (VAR) model is applied. The results revealed that the interest rate have a negative relationship with the inflation meanwhile the money supply and the exchange rate have a positive relationship with the inflation. Bank Negara Malaysia should ensure that the money supply is in suitable level because the relationship of the money supply have significant positive relationship at 5% of the confidence intervals with the inflation in Malaysia.