InflationDynamicsinMalaysia-BatesCollege.pdfVIP

Inflation Dynamics in Malaysia ? Abstract Low and stable inflation has been one of the main features of the Malaysian economy in the last two decades. Nevertheless, the abandonment of the explicit anchor represented by the seven-year-old exchange rate peg in July of 2005 and the recent rise in inflation underscores the need for a better understating of inflation dynamics in Malaysia. Firstly, this paper attempts to fill this gap by reviewing the behavior of inflation in the last decade and a half and estimating inflation models that can be used for forecasting. We analyze the behavior of inflation in Malaysia during 1991-2006, paying particular attention to the subcomponents of the CPI responsible for the significant changes in inflation; we then propose two measures of Core Inflation. Secondly, we econometrically uncover the dynamics of inflation from two different perspectives. An error correction model shows that money growth, nominal effective exchange rate, unit labor costs growth, deviations from mark-up pricing, and excess money supply have significant effects on inflation. The second approach is based on the New Keynesian Phillips Curve (NKPC). Estimates of the NKPC reveal that inflation has sizeable backward looking component (inertia) but it also depends on expected inflation rate, the exchange rate, and a measure of demand pressure. The results appear to be relatively robust with the inclusion of a survey-based proxy to measure inflation expectations and distinct measures of demand pressure. Roberto Fernandes Guimar?es-Filho Daniel Riera Crichton Asian Pacific Department Department of Economics; E2 700 19th Street. 1156 High St. International Monetary Fund University o