Legacy of the Two Crises: The Case of Malaysia *

Abstract

This paper examines the long-run effects of the two crises, that is, the Asian currency crisis and the subprime financial crisis, on the Malaysian GDP. Using a Markov-switching unobserved components model, we decompose the Malaysian GDP into the permanent and transitory components which are subject to possible shifts around the two crises periods. According to the estimation results with the quarterly GDP over 1986:Q1 to 2011:Q1, the output loss caused by the two crises was moderate in the sense that the trend output did not decrease even in the midst of the two crisis-driven recessions, despite the sharp declines in actual GDP. Also, comparison of the actual and trend growth rates across the pre-, inter-, and post-crises periods strongly suggests that the growth potential of the Malaysian economy has declined after the two crises.