Financial Liberalization and Money Demand in Asean Countries: Implications for Monetary Policy
IMF Working Papers, March 1, 1997
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- Financial Liberalization and Money Demand in Asean Countries: Implications for Monetary Policy
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Bibliographic details
- Authors: Robert Dekle, Mahmood Pradhan
- Published: March 1, 1997
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451845419.001
Summary and scope
- Examines the impact of financial market development and liberalization on money demand behavior in Indonesia, Malaysia, Singapore, and Thailand since the early 1980s.
- Empirical results indicate continuing instability in the interaction of money growth, economic activity, and inflation.
- Discusses the feasibility of alternative policy frameworks—including nominal exchange rate targets, and inflation targets—in the context of the substantial and sustained increase in foreign capital inflows.
Key empirical findings
- Continuing instability in the interaction of money growth, economic activity, and inflation is documented for the four countries studied (Indonesia, Malaysia, Singapore, Thailand).
- Rapid growth and ongoing changes in financial markets have altered money demand behavior, implying that traditional money demand relationships are less stable.
- The analysis emphasizes the importance of accounting for financial market development and liberalization when modeling money demand and interpreting monetary aggregates.
Policy implications and recommendations
- Monetary policy needs to be guided by a wider set of monetary and real sector indicators of inflationary pressures, rather than relying solely on money growth.
- The paper discusses the feasibility of alternative policy frameworks in light of increased foreign capital inflows:
- Nominal exchange rate targets as one possible framework.
- Inflation targets as another possible framework.
- Policy choices should account for the substantial and sustained increase in foreign capital inflows and the associated effects on domestic money demand and inflation dynamics.
Subjects and keywords
- Subjects: Banking, Demand for money, Financial markets, Inflation targeting, Monetary base, Monetary policy, Money, Securities markets, Stock markets
- Keywords: broad money, broad money velocity, Cointegration, Demand for money, Europe, Financial Liberalization, Inflation targeting, interest rate, interest rate target, market, Monetary base, monetary policy, money demand, money demand behavior, money demand equation, money demand instability, money market-LIBOR differential, money-broad money, nominal exchange rate, opportunity cost, paper market, Securities markets, Singapore bond market, Stock markets, time deposit, WP
Source: IMF Working Papers — "Financial Liberalization and Money Demand in Asean Countries: Implications for Monetary Policy" (Robert Dekle, Mahmood Pradhan), Working Paper No. 1997/036, March 1, 1997.