Causality between domestic fuel price and economic sectors: evidence from Malaysia

This paper makes an attempt to test the possible directions of causality between domestic fuel price and economic sectors in particular manufacturing and construction sectors. Malaysia is taken as a case study. As oil plays an important role in determining other prices, a higher fuel price affects the productivity of a country, and a lower productivity can adversely impact economic growth. Standard time-series techniques are applied using the error correction and variance decompositions techniques including the ‘long-run structural modelling (LRSM). The findings, based on the variance decompositions analysis, tend to suggest that in Malaysia, domestic fuel price is driven by manufacturing sector and followed by the construction sector. In other words, the construction sector is affected by the fuel price. The result of this study has an important implication for the Malaysian government in formulating policies on oil prices specifically domestic fuel prices as the Malaysian government needs to control the price in ensuring that unstable price will not jeopardize the construction sector. Proactive initiatives in replacing the fuel as an alternative will help the developing country like Malaysia overcome the global oil price shocks