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Financial Factors And The Empirical Behavior Of Money Demand: A Case Study Of Malaysia

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Author Info
MANSOR H. IBRAHIM

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Abstract

The paper analyses the roles of financial factors in the behavior of M1 and M2 demands for Malaysia. The focus is on the possible changes in the elasticities of the M1 and M2 money demands in the environment of financial innovations and on the influence of real stock prices on the holdings of monetary assets. Our results reinforce existing studies that find the presence of the long-run M1 and M2 money demands and structural instability in the dynamic specification of the M1 demand. However, we are able to identify stable error-correction model for the post-1986 M1 demand and for the M2 demand. Our results also indicate the reduction in the long run income and exchange rate elasticities of the money demands. Meanwhile, the interest rate sensitivity of the demands becomes more inelastic. Lastly, we document the significance of real stock prices in influencing the demand behavior, indicating the dominance of the wealth effect over the substitution effect. [E41, E44]

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Publisher Info
Article provided by Korean International Economic Association in its journal International Economic Journal.

Volume (Year): 15 (2001)
Issue (Month): 3 (October)
Pages: 55-72
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Handle: RePEc:taf:intecj:v:15:y:2001:i:3:p:55-72

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  2. Mansor H. Ibrahim, 1998. "An Econometric Analysis of Money Demand and Its Stability in the Malaysian Economy," Indian Economic Review, Department of Economics, Delhi School of Economics, vol. 33(1), pages 53-66, January.
  3. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
  4. Friedman, Milton, 1988. "Money and the Stock Market," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 221-45, April. [Downloadable!] (restricted)
  5. R. W. Hafer & Scott E. Hein, 1982. "Financial innovations and the interest elasticity of money demand: some historical evidence," Working Papers 1982-011, Federal Reserve Bank of St. Louis. [Downloadable!]
  6. Phillips, P.C.B., 1986. "Understanding spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 33(3), pages 311-340, December. [Downloadable!] (restricted)
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  7. Bahmani-Oskooee, Mohsen & Pourheydarian, Mohammad, 1990. "Exchange Rate Sensitivity of Demand for Money and Effectiveness of Fiscal and Monetary Policies," Applied Economics, Taylor and Francis Journals, vol. 22(7), pages 917-25, July.
  8. Masoud Moghaddam, 1997. "Financial innovations and the interest elasticity of money demand: Evidence from an error correction model," Atlantic Economic Journal, International Atlantic Economic Society, vol. 25(2), pages 155-163, June. [Downloadable!] (restricted)
  9. Demirguc-Kunt, Ash & Levine, Ross, 1996. "Stock Market Development and Financial Intermediaries: Stylized Facts," World Bank Economic Review, Oxford University Press, vol. 10(2), pages 291-321, May.
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  10. Keith Cuthbertson & Mark P. Taylor, 1990. "Money demand, expectations, and the forward-looking model," Proceedings, Federal Reserve Bank of Cleveland, pages 289-324.
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  11. Choudhry, Taufiq, 1996. "Real stock prices and the long-run money demand function: evidence from Canada and the USA," Journal of International Money and Finance, Elsevier, vol. 15(1), pages 1-17, February. [Downloadable!] (restricted)
  12. David F. Hendry & Neil R. Ericsson, 1989. "An econometric analysis of UK money demand in MONETARY TRENDS IN THE UNITED STATES AND THE UNITED KINGDOM by Milton Friedman and Anna J. Schwartz," International Finance Discussion Papers 355, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  13. Thornton, John, 1998. "Real Stock Prices and the Long-Run Demand for Money in Germany," Applied Financial Economics, Taylor and Francis Journals, vol. 8(5), pages 513-17, October. [Downloadable!] (restricted)
  14. Chowdhury, Abdur R, 1997. "The Financial Structure and the Demand for Money in Thailand," Applied Economics, Taylor and Francis Journals, vol. 29(3), pages 401-09, March. [Downloadable!] (restricted)
  15. Sims, Christopher A & Stock, James H & Watson, Mark W, 1990. "Inference in Linear Time Series Models with Some Unit Roots," Econometrica, Econometric Society, vol. 58(1), pages 113-44, January. [Downloadable!] (restricted)
  16. Kevin Furey, 1993. "The Effect of Trading in Financial Markets on Money Demand," Eastern Economic Journal, Eastern Economic Association, vol. 19(1), pages 83-90, Winter. [Downloadable!]
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  18. Bahmani-Oskooee, Mohsen & Martin, Miquel-Angel Galindo & Niroomand, Farhang, 1998. "Exchange Rate Sensitivity of the Demand for Money in Spain," Applied Economics, Taylor and Francis Journals, vol. 30(5), pages 607-12, May. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Leong, Choi-Meng & Puah, Chin-Hong & Abu Mansor, Shazali & Evan, Lau, 2008. "Testing the Effectiveness of Monetary Policy in Malaysia Using Alternative Monetary Aggregation," MPRA Paper 10568, University Library of Munich, Germany. [Downloadable!]
  2. Muhd-Zulkhibri Abdul Majid, 2004. "Reassessing The Stability of Broad Money Demand in Malaysia," Macroeconomics 0405020, EconWPA. [Downloadable!]
  3. 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)
  4. Khan, Muhammad Arshad & Sajjid, Muhammad Zabir, 2005. "The Exchange Rates and Monetary Dynamics in Pakistan: An Autoregressive Distributed Lag (ARDL) Apporach," MPRA Paper 6752, University Library of Munich, Germany. [Downloadable!]
  5. Venus Khim-Sen Liew, 2004. "Which Lag Length Selection Criteria Should We Employ?," Economics Bulletin, Economics Bulletin, vol. 3(33), pages 1-9. [Downloadable!]
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