MONEY DEMAND IN MALAYSIA: FURTHER EMPIRICAL EVIDENCE

Huzaimi Hussain and Venus Liew

The IUP Journal of Applied Economics, 2006, vol. V, issue 6, 17-27

Abstract: Cointegration, error correction models and CUSUM stability test have been employed in this study to analyze the money demand in Malaysia with relation to its determinants, namely, real income level, real interest rate, nominal exchange rate, and the degree of monetization. Using Malaysian monthly data covering 1979 M1 to 2002 M5, the authors find a cointegration relationship between M1 as well as M2, and their determinants. CUSUM stability test shows that both M1 and M2 are stable in this sample period, in spite of the financial innovations, liberalization and the Asian financial crisis. A key contribution of this study is the inclusion of the degree of monetization variable, which is found to be playing a significant role in the cointegrating equation. Earlier studies that found no cointegration between money demand and its determinants in Malaysia rendering Bank Negara Malaysia to shift its monetary targeting to interest rate targeting may be due to the omission of the degree of monetization variable. Hence, this finding suggests that M1 and M2 can be effective monetary targeting tools in the implementiation of monetary policy.

Date: 2006
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Persistent link: https://EconPapers.repec.org/RePEc:icf:icfjae:v:05:y:2006:i:6:p:17-27

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