Summary: This study investigates the relationship between relative price variability and inflation in three regions in Malaysia namely Peninsular Malaysia, Sabah and Sarawak. Using monthly time series data from January 1970 until Mac 2005, this study utilizes the non-linear time series technique of STAR and LSTAR models. Based on the empirical evidence, it is clearly shown that the relative price variability has non-linear characteristic. In addition, inflation is also significant and positively related to influence the relative price variability in all the three regions. The empirical findings also reveal that the relationship between the relative price variability and inflation is in the form of non-linear. The findings support the menu-cost theory which stipulates that the variability of price will increase when there is an increase in the general price level. Beside that, the stochastic components of relative price variability have shown persistency in all the regions. The study implies that the price control policy and the implementation of monetary policy should also be focused to control relative price stability among the group of goods.
Item Description: Published in International Journal of Management Studies (IJMS) 15.2(2008): pp. 165-182

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