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The Demand for Money in an Open Economy: the Case of Malaysia

  • Omar Marashdeh

    (The University of Sydney)

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    The purpose of this paper is to estimate the demand for money in Malaysia over the 1980:1-1994:10 period using cointegration and error correction methodology. The analysis shows that money balance, income, exchange rate, price and interest rate are cointegrated. Thus, the long- run demand for money balances for M1 is specified and estimated by using Johansen and Juselius Maximum likelihood cointegration method. The calculated errors from the long run money demand for M1 are then used in the error correction model of M1 demand. Hendry and Ericsson's general to specific procedure is used to reach the final form of the short-run dynamic demand for money. The explanatory variables that influence the money demand (M1) in the short run are income, expected inflation rate, 6-months mode deposit rate, expected rate of change of exchange rate, seasonal dummies, and the error correction from the long-run demand for money. Chow test shows that the estimated demand function remains stable over the 1980:1-1994:10 period. The findings, also, indicate the presence of currency substitution in Malaysia.

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    Paper provided by EconWPA in its series International Finance with number 9801001.

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    Length: 13 pages
    Date of creation: 03 Jan 1998
    Date of revision:
    Handle: RePEc:wpa:wuwpif:9801001
    Note: Type of Document - Word 6; prepared on IBM PC ; to print on HP; pages: 13
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    1. Perron, P., 1986. "Trends and Random Walks in Macroeconomic Time Series: Further Evidence From a New Approach," Cahiers de recherche 8650, Universite de Montreal, Departement de sciences economiques.
    2. Mohsen Bahmani-Oskooee & Miquel-Angel Galindo Martin & Farhang Niroomand, 1998. "Exchange rate sensitivity of the demand for money in Spain," Applied Economics, Taylor & Francis Journals, vol. 30(5), pages 607-612.
    3. Mehra, Yash P, 1993. "The Stability of the M2 Demand Function: Evidence from an Error-Correction Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(3), pages 455-60, August.
    4. Phillips, P C B, 1987. "Time Series Regression with a Unit Root," Econometrica, Econometric Society, vol. 55(2), pages 277-301, March.
    5. Arango, Sebastian & Ishaq Nadiri, M., 1981. "Demand for money in open economies," Journal of Monetary Economics, Elsevier, vol. 7(1), pages 69-83.
    6. 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.
    7. Peter C.B. Phillips & Pierre Perron, 1986. "Testing for a Unit Root in Time Series Regression," Cowles Foundation Discussion Papers 795R, Cowles Foundation for Research in Economics, Yale University, revised Sep 1987.
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