Speaker
Description
The Malaysia's fiscal position, as measured by budget balance, has exhibited a persistent deficit since the 1997–1998 Asian Financial Crisis. This trend of budgetary shortfalls has driven up the government debt ratio, nearly reaching the statutory limit. The Fiscal Theory of the Price Level postulates that if fiscal policy fails to respond to government debt, it can anchor prices rather than monetary policy, implying a non-Ricardian fiscal regime. This research therefore aims to investigate the behaviour of Malaysian fiscal policy. The study employs both backward-looking and forward-looking approaches, spanning the period from 1980:Q1 to 2023:Q4. The findings suggest that fiscal policy in Malaysia adheres to a Ricardian regime, where an increase in government debt induces a rise in the primary surplus. Furthermore, according to the impulse response functions, a positive shock to the primary surplus leads to a decrease in government debt. The results imply that fiscal policy does respond to government debt to ensure the sustainability of fiscal policy.
