The re-examination of the dynamic relationship between money, output and economic growth in Malaysia

Norimah Rambeli @ Ramli

QR Code Link :
Type :	article
Subject :	HB Economic Theory
Main Author :	Norimah Rambeli @ Ramli
Additional Authors :	Norasibah Abdul Jalil Pidivinsky, Jan M.
Title :	The re-examination of the dynamic relationship between money, output and economic growth in Malaysia

Place of Production :	Tanjong Malim
Publisher :	Fakulti Pengurusan dan Ekonomi
Year of Publication :	2019
Corporate Name :	Universiti Pendidikan Sultan Idris
PDF Guest :	Click to view PDF file

Abstract : Universiti Pendidikan Sultan Idris

Historically, the development of the country's economy has explained how the country's financial and fiscal policies are being utilized in order to achieve the country's goals of increasing productivity and achieving developed nation status. The dynamic integration of the two policies each year requires a detailed investigation, especially as they involve specific policies to address the economic crisis. Thus, the motivation of this study is to examine the dynamic relationship between money, output and economic growth in two different exchange rate regimes in Malaysia, namely exchange rates before the Asian financial crisis (floating exchange rate) and exchange rates after the Asian financial crisis (floating with basket currencies exchange rate). Although many similar studies have been carried out, there is still little exploration in the issues studied involving different exchange rate regimes, particularly for Malaysian issues. In order to achieve this objective, monthly frequency time series data is used starting January 1990 until December 2018. The selected macroeconomics data is utilized, namely industrial production index, broad money, consumer price index, lending interest rate, net export, and bilateral exchange rate. The two exchange rate regimes are based on announcemen commitment by the Central Bank of Malaysia, in dealing with the Asian financial crisis in 1997. This study adopted the Sims approach which includes multivariate Johansen Juselius co-integration test and vector error correction model. The results suggest that, broad money and output are moving together in the same direction in the long term to develop the long-term equilibrium among the variable in the equations system across the regimes. The results further suggest that, the output and broad money plays an important role in driving economic growth in Malaysia in every condition of the economi scenario, across the exchange rate regime. This has been proven by the significance result of broad money and output across the regimes under investigation

References

Ariff.M.(1996). Effects of Financial Liberalization on Four Southeast Asian Financial Markets. ASEAN Economic Bulletin, Vol. 12, No. 3, pp. 325-338.

Arkib Negara Malaysia. (2007). Jejak – Jejak Pembangunan 1957 – 2007. Utusan Publication & Distributors Sdn. Bhd.

Asmah. E.E. (2013). Sources of Real Exchange Rate Fluctuations in Ghana. America Journal of Economics, 3(6), 291-302.

Brace.A, Gatarek.D & Musiela.M. (1997). The Market Model of Interest Rate Dynamics. Mathematical Finance, Vol. 7, No. 2, 127-147.

Branko Krni?. (2014). Determinants of Lending Interest Rates Granted to Companies in Croatia. Journal of Accounting and Management. VERN’ University of Applied Sciences, Zagreb, Croatia. Preliminary communication paper.

Chan.K.C., Andrew.K.G., Longstaff.F.A, & Sanders.A.B. ( 1992). An Empirical Comparisonof Alternative Models of the Short-Term Interest Rate. The Journal of Finance, Vol. XLVII, No. 3.

Chia, R.C.J. & Lim, S.Y. (2015). Malaysian Stock Price And Macroeconomic Variables: Autoregressive Distributed Lag (ARDL) Bounds Test. Kajian Malaysia, 33, 85-103.

Christie. A. A. (1982). The Stochastic Behavior of Common Stock Variances. Journal of Financial Economics, 10, 407-432.

Chung. H. L. (2003). Financial liberalization and the economic crisis in Asia. RoutledgeCurzon

Collard. F. & Dellas. H. (2002). Exchange rate systems and macroeconomic stability. Journal of Monetary Economics, 49, 571-599.

Cook. D. (1999). The liquidity effect and money demand. Journal of Monetary Economics, 43, 377-390.

Dickey. D. A. & Fuller. W.A. (1981). Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root. Econometrica, Vol. 49, No. 4, pp. 1057-1072.

Engle. F.R. & Granger. C.W.J. (1987). Co-integration and Error Correction: Representation, Estimation, and Testing. Econometrica, Vol. 55, No. 2, pp. 251-276.

Fase. M.M.G. & Abma. R.C.N. (2003). Financial environment and economic growth in selected Asian countries. Journal of Asian Economics, 14, 11-21.

Fatemeh, R., Azali, M., Lee, C., Habibullah, S.M.(2017).The Role of Monetary Policy in Macroeconomic Volatility of Association of Southeast Asian Nations-4 Countries against Oil Price Shock over Time. International Journal of Energy Economics and Policy, 5(3), 731-737.

Fratzsher.M. (2003). On currency crises and contagion. International Journal of Finance and Economics, 8, 109 – 129.

Gultekin. M.N., Gultekin. N.B., & Penati. A. (1989). Capital controls and International Capital Market segmentation: The evidence from the Japanese and American Stock Markets. The Journal of Finance, Vol. XLIV, No. 4.

Ho. T.S.Y. & Lee. S.B. (1986). The structure movement and pricing interest rate contigent claims. The Journal of Finance, Vol. XLI, No. 5.

Hue. H.A, Gan. C, & Treepongkaruna.S. (2004). Co-integration and causality in the Asian and emerging foreign exchange markets: Evidence from the 1990s financial crises. Interbational Review of Financial Analysis, 13, 479-515.

Hull. J. & White. A. (1990). Pricing Interest Rate Derivative Securities. The Review of Financial Studies, Vol. 3, No. 4.

Johansen.S. & Juselius.K. (1990). Maximum Likelihood Estimation and Inference on Cointegration – with Applications to the Demand for Money. Oxford Bulletin of Economics and Statistics, 52, 2.

Johansen.S. (1988). Statistical Analysis of Co-integration Vectors. Journal of Economic Dynamics and Control, 12, 231-254.

Joyce. J. P. & Kamas. L. (1994). Money and output under alternative exchange rate regimes in the USA. Journal of International Money and Finance, 13(6), 679-697.

Julien Matheson. (2003). Is growth useful in RBC models?. Economic Modelling, 20(2), 605- 622.

Kannapiran. D.C. A. (2001). Stability of Money Demand and Monetary Policy in Papua New Guinea: An Error Correction Model Analysis. International Economic Journal, 15(3), 73-84.

Kevin S. Nell (2000) The Endogenous/Exogenous Nature of South Africa’s Money Supply Under Direct and Indirect Monetary Control Measures, Journal of Post Keynesian Economics, 23:2, 313-329, DOI: 10.1080/01603477.2000.11490283.

Khalid, N., Ahmad, M.A.S., Hamidi, H.N.A. (2018) Non-linear monetary policy reactionfunction in Malaysia: Evidence using a Markov Switching Vector Autoregression. International Journal of Economics and Management, 12(1), 189-203.

Khalid. N. & Fakhzan. N. (2013). The Effect of Regime Switching Policy Rules on Economic Growth. Jurnal Ekonomi Malaysia, 47(2), 93 – 109.

Lindbeck. A. (1992). Macroeconomic theory and the labor market. European Economic Review, 36, 209-235.

Mankiw. N. G. (1989). Real Business Cycles: A New Keynesian Perspective. Journal of Economic Perspectives, Vol.3, No.3, 79 – 90.

Mankiw. N.G. (1994). Monetary Policy. The Univesity of Chicago Press, p. 221-261.

Masih. A. M. M. & Masih. R. (1997). Dynamic Linkages and the Propagation Mechanism Driving Major International Stock Markets: An Analysis of the Pre- and Post- Crash Eras. The Quarterly Review of Economics and Finance, Vol. 37, No.4, pp 589-885.

Masih. A. M. M. (1996). Empirical Tests to Discern the Dynamic Casual Chain in Macroeconomic Activity: New Evidence from Thailand and Malaysia based on a Multivariate Co-integration/Vector Error-Correction Modelling Approach. Journal of Policy Modelling, 18(5), 531-560.

Masih. A. M. M. (2005). Macroeconomic Policy Trilemma in Open Economics: Which Policy Option is Ideally Suited to the Malaysia Context? Jurnal Pengurusan, 24, 3-26.

Miller. V. (2004). When zero interest rate differentials signal a lack of currency peg credibility. Economics Letters, 82, 357-361.

Munir, Q., Mansur, K., & Furuoka, F. (2009). Inflation And Economic Growth In Malaysia: A Threshold Regression Approach. ASEAN Economic Bulletin, 26(2), 180-193.

Norimah, R., & Emilda, H, Asmawi, H. A., Dayang Affizah, A. M., & Podivinsky, J. (2017). Empirical analysis on exchange rate fluctuation and sectoral stock returns in Malaysia. Jurnal Ekonomi Malaysia, 51(1), 33-40. DOI: 10.17576/JEM-2017-5001-3

Norimah, R., & Podivinsky, J. (2013). A Study of Exogeneity Tests on Export-Led Growth Hypothesis: The Empirical Evidences on Post-Crisis Exchange Rate Regime inMalaysia. International Business Education Journal., 6(1), 7-20.

Norimah. R, (2004). Dynamic Relationship between Money, Output and Exchange Rate in Two Exchange Rate Regime. Unpublished article.

Oskooee. M. B., Martin. M. G. & Niroomand. F. (1998). Exchange rate sensitivity of the demand for money in Spain. Applied Economics, 30:5, 607-612.

Osterwald-Lenum. M. (1992). A Note with Quantiles of the Asymptotic Distribution of the Maximum Likelihood Co-integration Rank Test Statistics. Oxford Bulletin of Economics and Statistics, 54, 3.

Pasinetti. L. L. (1962). Rate of Profit and Income Distribution in Relation to the Rate of Economic Growth. Review of Economic Studies, Vol.29, No.4, pp.267 – 279.

Pinga. V. E. B. (2001). Money, prices and causality: monetarist versus structuralist explanations using pooled country evidence. Applied Economics, 33(10), 1271-1281.

Raj.A & Mbodja.M. (1996). Co-integration among Asian currencies: Evidence of the increasing influenced of the Japanese yen. Japan and World Economy, 8, 291-308.

Sheriff, I. M. & Amoako, G. K. (2014). Macroeconomic Determinants of Interest Rate Spread in Ghana: Evidence from ARDL Modelling Approach. Journal of Finance and Bank Management, 2(2), 115-132.

Sherman. C. C. & Lee. J. (1993). Integration vs Segmentation in the Korean Stock Market. Journal of Business Finance & Accounting, 20(2), 0306-686X.

Siddiqui, K., & Anjum, M. (2013). Perceptions towards credit card usage: Factor analytic finding from Pakistan. International Journal of Economics Business and Management Studies, 2(3), 128-135.

Sims. C. A. (1972). Money, Income, and Causality. The American Economic Review, Vol. 62, No. 4, pp. 540-552.

Tamat.S & Abu Hassan Shaari Mohd Nor. (2001). Keberkesanaan Dasar Kadar Pertukaran Tetap Dalam Mengkesampingkan Faktor Luar di BSKL. Jurnal Pengurusan, 20, 47-67.

Tang, T.C., (2018). Financial Sector And Aggregate Import Demand: A General Equilibrium Perspective With Japan Data. Asian Academy of Management Journal of Accounting and Finance. 14(2), Pages 45-64.

Taylor. M. P. & Tonks. I. (1989). The International of Stock Markets and Aboilition of U.K. Exchange Control. Review of Economic and Statistics, Vol. 71, No. 2, pp 332 – 336.

Victoria Millen. (2000). Central bank reactions to banking crises in fixed exchanges rate regimes. Journal of Development Economics, Vol. 63, 451-472.

Wong. K. P. (1997). On the Determinants of Bank Interest Margins under Credit and Interest Rate Risks. Journal of Banking and Finance, 21, 251 – 271.

Yuga Raj Bhattarai, Ph.D. (2015). Determinants of Lending Interest Rates of Nepalese Commercial Banks. Economic Journal of Development Issues Vol. 19 & 20 No. 1-2.

Yusof. A. Z. & Bhattasali. D. (2008). Economic Growth and Development in Malaysia: Policy Making and Leadership.

This material may be protected under Copyright Act which governs the making of photocopies or reproductions of copyrighted materials.
You may use the digitized material for private study, scholarship, or research.

Back to previous page