Asset market inflation in Malaysia: dimensions, causes & policy implications

Abstract

One major consideration in determining the sustainability of economic growth is the acceptable degree of price stability. Until recently the issue of price stability has been focused mainly on prices of goods and services. However, the recent experience of the industrial economies like the United States and Japan and the on- going shake-out in the property markets of some of the Asian countries have directed attention to the importance of asset prices. The built-up in asset prices and its subsequent unwinding has far reaching consequences on overall price stability and on the real sectors of the economy. In this paper, we address the issue of inflation in the asset markets in this country. The focus of our paper is to evaluate the extent to which the run-up in the property and stock prices in recent years can be attributed to economic fundamentals and the extent to which the price appreciation is fueled by speculative bubbles. We then analyze the macroeconomic sources of asset price increase and the implications for the economy.