US monetary policy shocks and macroeconomic fluctuations in Malaysia

This research intends to investigate the US monetary shocks and its impact on selected macroeconomic variables on Malaysia, a small and open economy. This research estimates a structural VAR model using monthly data from January 2000 to February 2016. The result suggests that the Malaysian ringgit and industrial production were mostly affected by the US financial market variables. In comparison, Malaysia's inflation rate was relatively less affected by this external shock as compared to oil price shocks. This shows that the Malaysian ringgit serves as the primary absorber of the external shocks. Given that Malaysia works under a flexible exchange rate system, when the economy experiences external shocks, the nominal exchange rate serves as a natural automatic shock absorbe