Household debt and private consumption in Malaysia

• Main Author: Teoh, Yi Qun
• Format: Thesis
• Language: English
• Published: 2019
• Subjects: HG Finance
• Online Access: https://eprints.ums.edu.my/id/eprint/25201/1/Household%20debt%20and%20private%20consumption%20in%20Malaysia.pdf; https://eprints.ums.edu.my/id/eprint/25201/

Previous studies on the relationship between household debt and private consumption have produced mixed results. Despite the intense debate about the effects of household debt on private consumption, no studies have explicitly taken the disaggregate level of household debt into consideration. Therefore, this study aims to extend the relationship between household debt and private consumption beyond the standard investigation on by taking a more meticulous view of the effect of property and consumer debt in Malaysia. This study employed several time series econometric approaches and utilized quarterly data for Malaysia from 1997 to 2016. The Augmented Dickey Fuller test was used in this study to test the stationarity of the variables and found all the variables were stationary in first difference. Therefore, it then proceeds to the Johansen cointegration test. The cointegration test result shows the existence of three cointegrations for both the Trace test and the Maximum Eigenvalue test whereby there are long run relationships among the variables. Furthermore, the granger causality results show there is bilateral relationship between consumer debt and private consumption while property debt has no impact on private consumption. Although the cointegration test has shown that there are cointegration relationships between the variables, it does not present the dynamic interactions between the variables. Hence, this study involved variance decomposition and impulse response analyses to examine the effects of household debt on private consumption. The findings of variance decomposition and impulse response reveal that that there is a negative relationship between consumer debt and private consumption. More importantly, it shows that consumer debt is the major cause for private consumption while property debt shows no significant effect on private consumption. Contemporaneously, this study also contributes to the literature by assessing the role of household debt in the changes of aggregate private consumption by using the factor decomposition analysis method. Although higher household debts have threatened Malaysian economic growth, the results reveal that household debt plays an important role in the changes of aggregate private consumption.