ISSN: 2222-6990
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Fiscal sustainability has become a prominent issue in developing countries, and fiscal
sustainability assessments have become an increasingly demanded component of
macroeconomic analysis. Unfortunately, there is no single basic source of information on fiscal
sustainability. Country economists who are new to fiscal sustainability analysis could rely on
sample work by other economists and could delve into scattered journal articles for the
theoretical background. This paper focuses on a particular country: Malaysia. The main purpose
of this paper is to monitor fiscal sustainability in Malaysia using empirical analysis, and see
whether the fiscal sustainability indicators are consistent with the co-integration framework.
We employ VAR analysis as it is simple to compute and easily automated. We show how it is
possible to analyze a change of policy within a VAR framework. We also use a Multivariate Cointegration Test methodology to conduct inference about the co-integrating relationship
between fiscal sustainability indicators and output (GDP). Empirical validation from the time
series analysis finds that fiscal sustainability indicators and Gross domestic Product (GDP) are
co-integrated, which provides some support for the position that Malaysia’s fiscal sustainability
is sustainable in the long run in sampling period. This finding suggests that the Government
should improve the presentation of sustainability of fiscal policy and develop the analysis,
review the sustainability indicators, and strengthen the role of the long term estimates in the
design of short term fiscal policy.
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