Asymmetric Effects of Monetary and Fiscal Policies on Economic Activity: Empirical Evidence from Malaysia

Abstract

This paper investigates the asymmetric impacts of monetary and fiscal policies on Malaysia’s economic activity during the period 2010–2023 using the nonlinear autoregressive distributed lag (NARDL) model. The research aims to discern whether the transmission mechanisms of these policies demonstrate nonlinearity relative to positive and negative shocks, which is crucial for informed macroeconomic management in emerging markets like Malaysia. The empirical framework incorporates monthly macroeconomic data, including industrial production, interest rates, money supply, government expenditure and revenue, the exchange rate, producer price index, and unemployment. Results reveal significant asymmetric effects in monetary policy, with contractionary monetary actions exerting more pronounced and persistent negative effects on industrial output than expansionary measures. Fiscal policy, by contrast, is largely symmetric; increases and decreases in government spending and revenue affect industrial production similarly, reflecting conventional Keynesian multiplier processes. Exchange rate movements exhibit strong asymmetry depreciation of the Malaysian ringgit has a considerably greater adverse impact on industrial activity than appreciation yields positive benefits, highlighting the economy’s vulnerability to external shocks. Policy implications advise gradual monetary tightening and coordinated fiscal measures to preserve macroeconomic stability, while exchange rate management should prioritize stability to mitigate detrimental effects on industry. The findings contribute novel evidence supporting nonlinear policy transmission in emerging markets and advocate the use of advanced econometric techniques for future policy analysis.