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Testing the Effectiveness of Monetary Policy in Malaysia Using Alternative Monetary Aggregation

Choi-Meng Leong, Chin-Hong Puah, Shazali Abu Mansor and Evan Lau

Margin: The Journal of Applied Economic Research, 2010, vol. 4, issue 3, 321-338

Abstract: The capability of monetary aggregates to generate stable links with fundamental economic indicators verifies the effectiveness of monetary targeting. However, traditional monetary aggregates become flawed when financial reforms take place. As official monetary aggregates fail to maintain stable links with crucial economic indicators in Malaysia, monetary targeting has been substituted by interest rate targeting. Therefore, Divisia monetary aggregates, which are considered superior to their simple-sum counterparts are used in the investigation for Malaysia. The findings imply that Divisia M2 money demand is stable and capable of generating appropriate coefficients with correct signs for the variables included. Thus, Divisia money has shed new light on the usefulness of monetary targeting in formulating monetary policy in Malaysia.

Keywords: Divisia Money; Money Demand; Error-Correction Model; JEL Classifications: C22; JEL Classifications: C43; JEL Classifications: E41 (search for similar items in EconPapers)
Date: 2010
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