The Relationship Between Monetary Policy and Fiscal Policy on The Business Cycle in Malaysia

Abstract

The purpose of this study is to understand the relationship between monetary policy and fiscal policy on the business cycle in Malaysia. Monetary policy is represented by the money supply, exchange rates, government spending and taxes, while the business cycle is represented by economic growth. This study uses the period 1970–2017 by using the Vector Error Correction Model (VECM). We found that the money supply, exchange rate and government spending have a positive effect on the business cycle in Malaysia, however, taxes have a negative effect. This means that tax reductions in Malaysia have a positive impact on the business cycle in Malaysia which has an impact on increasing economic growth. Fiscal policy that is presented on tax and monetary policy in the money supply management policy has a direct impact on the business cycle in Malaysia.