Fiscal Deficit and Its Less Inflationary Sources of Borrowing with the Moderating Role of Political Instability: Evidence from Malaysia

Hanana Khan, Maran Marimuthu and Fong-Woon Lai
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Hanana Khan: Department of Management and Humanities, Universiti Teknologi PETRONAS, Seri Iskandar 32610, Perak, Malaysia
Maran Marimuthu: Department of Management and Humanities, Universiti Teknologi PETRONAS, Seri Iskandar 32610, Perak, Malaysia
Fong-Woon Lai: Department of Management and Humanities, Universiti Teknologi PETRONAS, Seri Iskandar 32610, Perak, Malaysia

Sustainability, 2020, vol. 12, issue 1, 1-16

Abstract: Theoretically, fiscal deficit may be inflationary, but its sources of financing can bring change in significance and impact. Malaysia is facing a high tendency of fiscal deficit from the last decade. To finance the fiscal deficit, which sources are less inflationary in the country? To answer this question, the study aims to analyze the quarterly financial time-series data covering the period from 2000 Q1 to 2018 Q4 of Malaysia using recent econometric techniques. The analysis is carried out in three stages. In the first stage, it is tested that the fiscal deficit is inflationary along with the money supply. In the second stage, it is determined that political instability moderates the link between inflation and the fiscal deficit and the external sources of borrowing in the short-run, while the domestic sources of borrowing in the long run are found inflationary. In the third stage, the central bank borrowing and Bank institutions borrowing from the domestic sources and the short-term borrowing from the external sources are found less inflationary. The findings suggest that borrowing through the central bank and bank institutions (domestic sources) is less inflationary in the long term; while for a short-term policy, from external sources, only short-term borrowing is less inflationary; medium- and long-term borrowing are much more sensitive to inflation.

Keywords: fiscal deficit; inflation; ADRL; FMOLS; DOLS; CCR; ECM; and cointegration (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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