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The feasibility of inflation targeting in Malaysia

  • Wai-Ching Poon

    ()

    (Monash University Malaysia)

  • Gee-Kok Tong

    ()

    (Multimedia University)

This paper aims to examine whether inflation targeting fits in Malaysia. The relationship between CPI, money supply (M1), money market rate, and exchange rate of the Malaysian economies from 1976:M1 to 2007:M12 is tested, considering the major transmission mechanism channels in the conduct of monetary policy stance. The Johansen-Juselius (JJ) multivariate cointegration procedure and Vector Error Correction Modelling (VECM) are applied to investigate the joint dynamics variables for both short and long run. Results reveal cointegration between CPI and exchange rate, money market rate, and money supply. Results show that changes in interest rate and exchange rate have significantly impacted the CPI in Malaysia in the short run, but insignificant from money supply. Inflation targeting may not fit in Malaysia because of its economic structure and institution may not be conducive at the current stage.

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Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 29 (2009)
Issue (Month): 2 ()
Pages: 1035-1045

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Handle: RePEc:ebl:ecbull:eb-08e60016
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