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

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

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Mansor H. Ibrahim (International Islamic University)

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Mansor H. Ibrahim

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.

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Publisher Info
Article provided by Department of Economics, Delhi School of Economics in its journal Indian Economic Review.

Volume (Year): 33 (1998)
Issue (Month): 1 (January)
Pages: 53-66
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Handle: RePEc:dse:indecr:v:33:y:1998:i:1:p:53-66

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Find related papers by JEL classification:
E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

Cited by:
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Mansor H. Ibrahim, 2001. "Financial Factors And The Empirical Behavior Of Money Demand: A Case Study Of Malaysia," International Economic Journal, Korean International Economic Association, vol. 15(3), pages 55-72, October. [Downloadable!] (restricted)
Mohsen Bahmani-Oskooee & Hafez Rehman, 2005. "Stability of the money demand function in Asian developing countries," Applied Economics, Taylor and Francis Journals, vol. 37(7), pages 773-792, April. [Downloadable!] (restricted)
Muhd-Zulkhibri Abdul Majid, 2004. "Reassessing The Stability of Broad Money Demand in Malaysia," Macroeconomics 0405020, EconWPA. [Downloadable!]

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This page was last updated on 2009-11-25.

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