The Impacts of Divisia Money on MYR/USD Exchange Rate Determination in Malaysia

Choi-Meng Leong, Chin-Hong Puah, Venus Liew and Matviychuk-Soskina Nadiya

A chapter in Recent Developments in Asian Economics International Symposia in Economic Theory and Econometrics, 2021, vol. 28, pp 243-261 from Emerald Group Publishing Limited

Abstract: The unstable money demand function over the recent decades may explain the unsatisfactory performance of the exchange rate model. Numerous studies have shown that Divisia money serves as a better variable for a stable money demand function. In this study, Divisia money is used as an alternative money supply in MYR/USD exchange rate determination. This study finds that Divisia money differential, real income differential, relative short-term interest rate and real stock prices affect the MYR/USD exchange rate in the long run. The major implication of this study is that policy-makers could monitor the MYR/USD exchange rate via the money supplies following the principle of Divisia monetary aggregate, which assigns higher weightage to more frequently traded monetary assets.

Keywords: Exchange rate; Divisia money; Malaysia; bounds testing; stock prices; monetary model (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eme:isetez:s1571-038620210000028014

DOI: 10.1108/S1571-038620210000028014

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