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Testing the Effectiveness of Monetary Policy in Malaysia Using Alternative Monetary Aggregation

Author

Listed:
  • Choi-Meng Leong
  • Chin-Hong Puah
  • Shazali Abu Mansor
  • Evan Lau

    (The authors are at the Department of Economics, Faculty of Economics and Business Universiti Malaysia Sarawak, 94300 Kota Samarahan, Sarawak, Malaysia. The corresponding author is Evan Lau; e-mail: lphevan@feb.unimas.my or ygwiex@yahoo.com)

Abstract

The capability of monetary aggregates to generate stable links with fundamental economic indicators verifies the effectiveness of monetary targeting. However, traditional monetary aggregates become flawed when financial reforms take place. As official monetary aggregates fail to maintain stable links with crucial economic indicators in Malaysia, monetary targeting has been substituted by interest rate targeting. Therefore, Divisia monetary aggregates, which are considered superior to their simple-sum counterparts are used in the investigation for Malaysia. The findings imply that Divisia M2 money demand is stable and capable of generating appropriate coefficients with correct signs for the variables included. Thus, Divisia money has shed new light on the usefulness of monetary targeting in formulating monetary policy in Malaysia.

Suggested Citation

  • Choi-Meng Leong & Chin-Hong Puah & Shazali Abu Mansor & Evan Lau, 2010. "Testing the Effectiveness of Monetary Policy in Malaysia Using Alternative Monetary Aggregation," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 4(3), pages 321-338, August.
    • Handle: RePEc:sae:mareco:v:4:y:2010:i:3:p:321-338
    DOI: 10.1177/097380101000400304
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    Cited by:

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    2. Chin-Hong, Puah & Lee-Chea, Hiew, 2010. "Financial Liberalization, Weighted Monetary Aggregates and Money Demand in Indonesia," MPRA Paper 31731, University Library of Munich, Germany.
    3. Tang, Maggie May-Jean, 2016. "A Review of the Literature on Monetary Neutrality," MPRA Paper 70113, University Library of Munich, Germany.
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    5. Khalid Kisswani & Salah Nusair, 2014. "Nonlinear convergence in Asian interest and inflation rates: evidence from Asian countries," Economic Change and Restructuring, Springer, vol. 47(3), pages 155-186, August.
    6. Nwanne, Nkem, 2017. "An Examination of the Neutrality of US Money Supply on the Nigerian Economy," MPRA Paper 82227, University Library of Munich, Germany.
    7. Biswajit Maitra, 2015. "Monetary Policy, Income Growth and Price Stability in Malaysia," South Asian Journal of Macroeconomics and Public Finance, , vol. 4(1), pages 91-117, June.
    8. El Alaoui, Abdelkader O. & Jusoh, Hashim Bin & Yussof, Sheila Ainon & Hanifa, Mohamed Hisham, 2019. "Evaluation of monetary policy: Evidence of the role of money from Malaysia," The Quarterly Review of Economics and Finance, Elsevier, vol. 74(C), pages 119-128.
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    More about this item

    Keywords

    Divisia Money; Money Demand; Error-Correction Model; JEL Classifications: C22; JEL Classifications: C43; JEL Classifications: E41;
    All these keywords.

    JEL classification:

    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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