An Econometric Analysis of Money Demand and Its Stability in the Malaysian Economy

Mansor Ibrahim

Indian Economic Review, 1998, vol. 33, issue 1, 53-66

Abstract: The paper utilizes cointegration technique and a battery of diagnostics statistics to evaluate the behaviour of money demand (M1 and M2) and examine whether the short-run money demand specification is structurally stable. The main finding is that, although there exists no long run relationship between M1 and the other macroeconomic variables considered, the long run relationship of M2 demand function is established. However, the evidence suggests that the short run of M2 demand is unstable. Thus, the usefulness of M2 target in the conduct of monetary policy depends crucially on the extent to which the policy makers can detect the structural break in the money demand function and on how long it takes for them to realize that there exists a behavioral change in the demand. Otherwise, the policy makers should only focus on long-run stabilization policies.

JEL-codes: E41 E44 (search for similar items in EconPapers)
Date: 1998
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Citations: View citations in EconPapers (10)

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