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Demand for M3 and expenditure components in Malaysia: assessment from bounds testing approach


  • Tuck Cheong Tang


This study examines the effects of various demand components of real income on money demand, M3 for a small open developing Asian economy. The disaggregated components of real income are final consumption goods, expenditure on investment goods, and exports. Other determinants are domestic interest rate and exchange rate. Using Malaysian annual data over the period 1973-1998, the results of the 'bound' test based on Unrestricted Error-Correction Model estimation (Pesaran et al., 2001), indicates a long run equilibrium relationship between demand of real M3 and its determinants. The results also highlight that different domestic demand components yields different effects on money demand behaviour. The results have important policy implications.

Suggested Citation

  • Tuck Cheong Tang, 2002. "Demand for M3 and expenditure components in Malaysia: assessment from bounds testing approach," Applied Economics Letters, Taylor & Francis Journals, vol. 9(11), pages 721-725.
  • Handle: RePEc:taf:apeclt:v:9:y:2002:i:11:p:721-725 DOI: 10.1080/13504850210126219

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    2. Rana Ejaz Ali Khan & Qazi Muhammad Adnan Hye, 2013. "Financial liberalization and demand for money: a case of Pakistan," Journal of Developing Areas, Tennessee State University, College of Business, vol. 47(2), pages 175-198, July-Dece.
    3. Soo Khoon Goh & Koi Nyen Wong, 2014. "Could Inward FDI Offset the Substitution Effect of Outward FDI on Domestic Investment? Evidence from Malaysia," Prague Economic Papers, University of Economics, Prague, vol. 2014(4), pages 413-425.
    4. Muhammad Arshad Khan, 2007. "Foreign Direct Investment and Economic Growth: The Role of Domestic Financial Sector," PIDE-Working Papers 2007:18, Pakistan Institute of Development Economics.
    5. Ferda HALICIOGLU & Mehmet UGUR, 2005. "On Stability of the Demand for Money in a Developing OECD," Macroeconomics 0508001, EconWPA.
    6. Silver, Steven D. & Verbrugge, Randal, 2010. "Home production and endogenous economic growth," Journal of Economic Behavior & Organization, Elsevier, vol. 75(2), pages 297-312, August.
    7. Ansgar Belke & Thorsten Polleit, 2006. "Monetary policy and dividend growth in Germany: long-run structural modelling versus bounds testing approach," Applied Economics, Taylor & Francis Journals, vol. 38(12), pages 1409-1423.
    8. Lee Chew Ging & Ng Pek Kim, 2011. "The dynamics of divorce, income, and female labor force participation in Singapore," Economics Bulletin, AccessEcon, vol. 31(4), pages 2757-2768.
    9. Ullah, Nazim, 2016. "The Relationship of Government Revenue and Government Expenditure: A case study of Malaysia," MPRA Paper 69123, University Library of Munich, Germany.
    10. James Payne, 2003. "Post stabilization estimates of money demand in Croatia: error correction model using the bounds testing approach," Applied Economics, Taylor & Francis Journals, vol. 35(16), pages 1723-1727.
    11. Ben Salha, Ousama & Jaidi, Zied, 2013. "Some new evidence on the determinants of money demand in developing countries – A case study of Tunisia," MPRA Paper 51788, University Library of Munich, Germany.
    12. Tang, Tuck Cheong, 2004. "Demand for broad money and expenditure components in Japan: an empirical study," Japan and the World Economy, Elsevier, vol. 16(4), pages 487-502, December.
    13. Fiaz Hussain & Shahzad Hussain & Naila Erum, 2015. "Are Defense Expenditures Pro Poor or Anti Poor in Pakistan? An Empirical Investigation," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 54(4), pages 875-894.
    14. 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.
    15. Emmanuel Ziramba, 2007. "Demand For Money And Expenditure Components In South Africa: Assessment From Unrestricted Error-Correction Models," South African Journal of Economics, Economic Society of South Africa, vol. 75(3), pages 412-424, September.
    16. James, Gregory A., 2005. "Money demand and financial liberalization in Indonesia," Journal of Asian Economics, Elsevier, vol. 16(5), pages 817-829, October.
    17. -, 2011. "An assessment of the economic impact of climate change on the Agriculture Sector in Guyana," Sede Subregional de la CEPAL para el Caribe (Estudios e Investigaciones) 38586, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    18. Abdullah, Muhammad & Chani, Muhammad Irfan & Ali, Amjad, 2012. "Determinants of Money Demand in Pakistan: Disaggregated Expenditure Approach," MPRA Paper 50977, University Library of Munich, Germany, revised 2013.
    19. P K Narayan & S Narayan, 2008. "Estimating the Demand for Money in an Unstable Open Economy: The Case of the Fiji Islands," Economic Issues Journal Articles, Economic Issues, vol. 13(1), pages 71-91, March.
    20. Paresh Kumar Narayan & Russell Smyth, 2003. "Attendance and pricing at sporting events: empirical results from Granger Causality Tests for the Melbourne Cup," Applied Economics, Taylor & Francis Journals, vol. 35(15), pages 1649-1657.

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