Measuring Permanent Effects of Economic Crisis: Evidence from Malaysia

Measuring Permanent Effects of Economic Crisis: Evidence from Malaysia

This paper investigates the permanent effects of the two economic crises, i.e., the Asian currency crisis and the subprime financial crisis, on the Malaysian economy. From a preliminary examination of the Malaysian GDP since the mid-1980s, I find that the sharp declines in real output in the midst of the two crises were followed by output increases faster than the pre-crisis rate in the early stage of the subsequent recoveries. Based on this evidence, I fit the model of Kim et al. (2005) that allows the post-recession bounce-back in output to the GDP of Malaysia. Estimation results show that, although the output losses incurred by the two crises are permanent, 37 to 38% of the maximum permanent losses in output was restored by the post-recession bounce back. It is also found that, given the decline in the growth rate since the mid-2000s, the subprime financial crisis caused almost the same degree of output loss as the former crises did.