Impact of Macro Economy on Financial Stability in Malaysia

Abstract

Research studies the influence of macroeconomic factors (inflation, exchange rates, and interest rates) and bank-specific factors (credit) on Non-Performing Loans (NPLs) in Malaysia for the period 2015 to 2018. This study uses the Vector Error Correction Model (VECM) to determine the effect of variables. independent consisting of macroeconomic factors and bank-specific factors. Based on the VECM estimation results, three variables that have a positive and significant effect on long-term NPL are credit, inflation and interest rates. Meanwhile, in the short term, there are only two variables that have a positive and significant effect on NPL, namely credit and interest rates. Inflation and exchange rate variables have a negative and insignificant effect on NPL in the short term.