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Monetary Policy, Income Growth and Price Stability in Malaysia

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  • Biswajit Maitra

Abstract

Malaysia is a rapidly progressing high middle-income economy. As a highly open economy with an increasingly liberalized financial sector, the implementation of a comprehensive macroeconomic policy is a challenging task. This article enquires into the efficacy of money in raising income and stabilizing price level, and it also attempts to identify the effective component of money in this direction over the period 1971–2012. The autoregressive distributed lag (ARDL) approach to co-integration confirms the existence of a long-run relationship among money, income and price level. Error correction mechanism (ECM–ARDL) models with a battery of econometric techniques such as vector autoregression (VAR) model, the Wald test and innovation accounting confirm that only M1 money supply causes a raise in income. Price level, on the other hand, negatively contributes to income. Three components of money supply namely M1, M2 and M3 lead to a raise in price or inflation where M2 money is found to be the most potent component provoking inflation. The role of income is insignificant. Competent management of monetary instruments, therefore, may promote higher income maintaining stability in price level. JEL Classification: E52, E31

Suggested Citation

  • 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.
    • Handle: RePEc:sae:smppub:v:4:y:2015:i:1:p:91-117
    DOI: 10.1177/2277978715574620
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    Cited by:

    1. Tafajul Hossain & Biswajit Maitra, 2020. "Monetary Policy, Trade Openness and Economic Growth in India Under Monetary-targeting and Multiple-indicator Approach Regimes," Arthaniti: Journal of Economic Theory and Practice, , vol. 19(1), pages 108-124, June.
    2. Takeshi Kawanaka, 2019. "Status Quo or Pluralism? Dominant Party Rule and People's Preferences in Singapore," The Developing Economies, Institute of Developing Economies, vol. 57(4), pages 311-336, December.

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    More about this item

    Keywords

    Monetary policy; money supply; price level; income growth; ARDL; VAR;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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