Abstract

The economic performance of Malaysia was affected by a series of financial crises that had induced macroeconomic instability in the country, which in turn had immensely dampened the nation’s economic growth rate. No doubt Malaysia needs an indicator to monitor the nation’s economic performance from time to time. This study attempts to construct such indicator known as Macroeconomic Instability Index (MII). The constructed MII shows two significant spikes at 1998 and 2008, which correspond to the Asian Financial Crisis and US Subprime Mortgage respectively, that had resulted in negative growth rate for GDP of Malaysia in 1999 and 2010. Results obtained from further analysis by the ARDL technique show that MII has negative and significance effects on economic performance. Moreover, MII has predictive power against economic performance as early as two periods in advance. The constructed MII could serve as end-product for policy purposes or intermediate-product for other economic and finance studies. 

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