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

Author

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  • Mansor H. Ibrahim

    (International Islamic University)

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.

Suggested Citation

  • 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.
  • Handle: RePEc:dse:indecr:v:33:y:1998:i:1:p:53-66
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    Cited by:

    1. Mohsen Bahmani-Oskooee & Dan Xi, 2014. "Economic Uncertainty, Monetary Uncertainty, and the Demand for Money: Evidence From Asian Countries," Australian Economic Papers, Wiley Blackwell, vol. 53(1-2), pages 16-28, June.
    2. Muhd-Zulkhibri Abdul Majid, 2004. "Reassessing The Stability of Broad Money Demand in Malaysia," Macroeconomics 0405020, EconWPA.
    3. Dahalan, Jauhari & Sharma, Subhash C. & Sylwester, Kevin, 2005. "Divisia monetary aggregates and money demand for Malaysia," Journal of Asian Economics, Elsevier, vol. 15(6), pages 1137-1153, January.
    4. Dahalan, Jauhari & Sharma, Subhash C. & Sylwester, Kevin, 2007. "Scale variable specification in a money demand function for Malaysia," Journal of Asian Economics, Elsevier, vol. 18(6), pages 867-882, December.
    5. Mansor Ibrhim, 2001. "Financial Factors and the Empirical Behavior of Money Demand: A Case Study of Malaysia," International Economic Journal, Taylor & Francis Journals, vol. 15(3), pages 55-72.
    6. Mohsen Bahmani-Oskooee & Hafez Rehman, 2005. "Stability of the money demand function in Asian developing countries," Applied Economics, Taylor & Francis Journals, vol. 37(7), pages 773-792.

    More about this item

    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

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