Determinants of food price inflation: evidence from Malaysia based on linear and nonlinear ARDL

Hasan, Amiratul Nadiah and Masih, Mansur (2018): Determinants of food price inflation: evidence from Malaysia based on linear and nonlinear ARDL.

Abstract

Given the adverse impact of growing inflation on food prices and the importance of policymakers to keep the food price inflation stable, this study aims to investigate the determinants of food price inflation. This study contributes to the existing literature by employing Nonlinear ARDL (NARDL) technique to identify whether the relationship between the focused variables is linear and symmetric or not. This study finds that the variables are cointegrated in the long run. The error correction model VECM and the Variance Decompositions analysis found that the exchange rate is the most exogenous variable and the government has no control over it since it is determined by the external factors such as, supply and demand for Malaysia ringgit. Further, NARDL found that the relationship between the food price and exchange rate to be symmetric in the long run but asymmetric in the short run. Since the exchange rate is the most exogenous variable in this study and the fact that Malaysia in on flexible exchange regime, it makes it hard for the policy makers to control the fluctuations of the Malaysian exchange rate to control food price. Hence the adjustment and control of food price should be made through the reduction of the food import in order to minimise the exchange rate pass through effect on the food price inflation.

• Item Type: MPRA Paper
• Language: English
• Keywords: food price inflation, exchange rate, ARDL, Nonlinear ARDL, Malaysia
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C58 - Financial Econometrics; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy

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