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

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Author Info
Leong, Choi-Meng
Puah, Chin-Hong
Abu Mansor, Shazali
Evan, Lau

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Abstract

The capability of monetary aggregates to generate stable link with fundamental economic indicators verifies the effectiveness of monetary targeting. However, traditional monetary aggregates have become flawed when financial reforms take place. As official monetary aggregates fail to maintain stable link with crucial economic indicators in Malaysia, monetary targeting has been substituted by interest rate targeting. Therefore, Divisia monetary aggregates, which are considered more superior than the simple sum counterparts are used in the investigation for the case of Malaysia. The findings imply that Divisia M2 money demand is stable and is capable to generate 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.

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File URL: http://mpra.ub.uni-muenchen.de/10568/
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Publisher Info
Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 10568.

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Date of creation: Jun 2008
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Handle: RePEc:pra:mprapa:10568

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Related research
Keywords: Divisia money; Money demand; Error-correction model;

Find related papers by 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
E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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References listed on IDEAS
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