Money demand amid financial sector developments in Malaysia

Eu Chye Tan

Applied Economics, 1997, vol. 29, issue 9, 1201-1215

Abstract: Both long and short run real money demand functions of Malaysia with money variously defined as M0, M1 and M2 have been estimated using the Johansen cointegration technique and the general-to-specific approach respectively. The period under review is 1973Q1-1991Q4. While liberalization and innovation in the Malaysian financial system have not ruled out the existence of stable long run money demand relationships as attested to by the presence of cointegrating vectors, they have rendered short run relationships unstable. Hence, it may not be appropriate for one to conclude that monetary policy efficacies have been sacrosanct to the financial liberalization and innovation process on the basis of cointegrating relationships. This is especially true as monetary policy is essentially a short run stabilization policy aimed at ironing out undue macroeconomic fluctuations. This prompted us to re-estimate short run money demand functions over more recent periods in order to boost the policy relevance of the estimated parameters.

Date: 1997
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DOI: 10.1080/00036849700000011

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