Demand for M2 in an Emerging-Market Economy: An Error-Correction Model for Malaysia

December 1, 1999

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper analyses demand for M2 in Malaysia from August 1973 to December 1995 under both the closed- and open-economy framework. Based on the cointegration and weak-exogeneity test results, short-run dynamic error-correction models are specified and estimated. The results indicate that the demand is for real M2. Both the long- and short-run models are well-specified and are fairly stable. The long-run income elasticity is close to one with the opportunity cost variables carrying the expected signs. The external events have some influence on the stability.

Subject: Capital markets, Demand for money, Exchange rates, Financial institutions, Financial markets, Foreign exchange, Inflation, Money, Prices, Treasury bills and bonds

Keywords: Asia, Capital markets, closed-economy formulation, cointegration, Demand for money, error-correction, Exchange rates, financial system, Global, Inflation, inflation rate, Malaysia, money demand, narrow money, net interest rate measure, open economy, opportunity cost, opportunity cost variable, rate of return, regime dummy, Treasury bills and bonds, WP

Pages:
49
Volume:
1999
DOI:
https://doi.org/10.5089/9781451858617.001
Issue:
173
Series:
Working Paper No. 1999/173
Stock No:
WPIEA1731999
ISBN:
9781451858617
ISSN:
1018-5941

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