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

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.
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Volume/Issue: Volume 1999 Issue 173
Publication date: December 1999
ISBN: 9781451858617
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Business and Economics , Finance , Inflation , Investments and Securities-General , Money and Monetary Policy , WP , opportunity cost , money demand , financial system , open economy , Asia , Malaysia , cointegration , error-correction , regime dummy , rate of return , narrow money , inflation rate , closed-economy formulation , opportunity cost variable , net interest rate measure , Demand for money , Exchange rates , Inflation , Treasury bills and bonds , Capital markets , Global

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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.

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