Scale variable specification in a money demand function for Malaysia

We investigate what scale variable is most appropriate in the money demand function for Malaysia. Candidates include income, consumption, disposable income, and domestic absorption and these are considered for simple sum M1 and M2 and for Divisia M1 and M2. Non-nested tests and other model selection criteria such as R² are used. The non-nested tests for the M1 aggregates are inconclusive but more support is given for income as the scale variable for the M2 aggregates, especially for Divisia M2. The other procedures also show that income is preferred for M2 and some support is also given for income for the M1 aggregates.     

Chinese Divisia Monetary Index and GDP Nowcasting

Since China’s enactment of the Reform and Opening-Up policy in 1978, China has become one of the world’s fastest growing economies, with an annual GDP growth rate exceeding 10 % between 1978 and 2008. But in 2015, Chinese GDP grew at 7 %, the lowest rate in 5 years. Many corporations complain that the borrowing cost of capital is too high. This paper constructs Chinese Divisia monetary aggregates M1 and M2, and, for the first time, constructs the broader Chinese monetary aggregates, M3 and M4. Those broader aggregates have never before been constructed for China, either as simple-sum or Divisia. The results shed light on the current Chinese monetary situation and the increased borrowing cost of money. GDP data are published only quarterly and with a substantial lag, while many monetary and financial decisions are made at a higher frequency. GDP nowcasting can evaluate the current month’s GDP growth rate, given the available economic data up to the point at which the nowcasting is conducted. Therefore, nowcasting GDP has become an increasingly important task for central banks. This paper nowcasts Chinese monthly GDP growth rate using a dynamic factor model, incorporating as indicators the Divisia monetary aggregate indexes, Divisia M1 and M2 along with additional information from a large panel of other relevant time series data. The results show that Divisia monetary aggregates contain more indicator information than the simple sum aggregates, and thereby help the factor model produce the best available nowcasting results. In addition, our results demonstrate that China’s economy experienced a regime switch or structure break in 2012, which a Chow test confirmed the regime switch. Before and after the regime switch, the factor models performed differently. We conclude that different nowcasting models should be used during the two regimes.     

The New CFS Divisia Monetary Aggregates: Design, Construction, and Data Sources

The Center for Financial Stability (CFS) has initiated a new Divisia monetary aggregates database, maintained within the CFS program called Advances in Monetary and Financial Measurement (AMFM). The Director of the program is William A. Barnett, who is the originator of Divisia monetary aggregation and more broadly of the associated field of aggregation-theoretic monetary aggregation. The international section of the AMFM web site is a centralized source for Divisia monetary aggregates data and research for over 40 countries throughout the world. The components of the CFS Divisia monetary aggregates for the United States reflect closely those of the current and former simple-sum monetary aggregates provided by the Federal Reserve. The first five levels, M1, M2, M2M, MZM, and ALL, are composed of currency, deposit accounts, and money market accounts. The liquid asset extensions to M3, M4-, and M4 resemble in spirit the now discontinued M3 and L aggregates, including repurchase agreements, large denomination time deposits, commercial paper, and Treasury bills. When the Federal Reserve discontinued publishing M3 and L, the Fed stopped providing the consolidated, seasonally adjusted components. Also the Fed no longer provides the interest rates on the components. With so much of the needed component quantity and interest-rate data no longer available from the Federal Reserve, decisions about data sources needed in construction of the CFS aggregates have been far from easy and sometimes required regression interpolation. This paper documents the decisions of the CFS regarding United States data sources at the present time, with particular emphasis on Divisia M3 and M4.     

Are the Responses of the U.S. Economy Asymmetric to Positive and Negative Money Supply Shocks?

We investigate whether the United States economy responds asymmetrically to positive and negative money supply shocks of different magnitude, using a test recently introduced by Kilian and Vigfusson (Quant Econ 2:419–453, 2011) based on impulse response functions. We use quarterly data, over the period from 1967:1 to 2014:1, and the new CFS Divisia monetary aggregates, making a comparison among the narrower monetary aggregates, M1, M2M, MZM, M2, and ALL, and the broad monetary aggregates, M4+, M4-, and M3. We show that there is no statistically significant evidence of asymmetry in the response of the U.S. economy to positive and negative money supply shocks of different magnitude.     

The Demand for Money for EMU: a Flexible Functional Form Approach

Monetary aggregates have a special role under the “two pillar strategy” of the ECB. Hence, a theoretically consistent measure of monetary aggregates for the European Monetary Union (EMU) is needed. This paper analyzes aggregation over monetary assets for the EMU. We aggregate over the monetary services for the eleven EMU (EMU-11) countries, which include Estonia, Finland, France, Germany, Ireland, Italy, Luxembourg, Malta, Netherlands, Slovakia, and Slovenia. We adopt the Divisia monetary aggregation approach, which is consistent with index number theory and microeconomic aggregation theory. The result is a multilateral Divisia monetary aggregate, in accordance with Barnett (J Econ 136(2):457–482, 2007). The multilateral Divisia monetary aggregate for the EMU-11 is found to be more informative and a better signal of economic trends than the corresponding simple sum aggregate. We then analyze substitutability among monetary assets for the EMU-11 within the framework of a representative consumer’s utility function, using Barnett’s (J Bus Econ Stat 1:7–23, 1983) locally flexible functional form, the minflex Laurent indirect utility function. The analysis of elasticities with respect to the asset’s user-cost prices shows that: (i) transaction balances and deposits with agreed maturity are income elastic and (ii) the monetary assets are not good substitutes for each other within the EMU-11. Simple sum monetary aggregation assumes that component assets are perfect substitutes. Hence simple sum aggregation distorts measurement of the monetary aggregate. The ECB provides Divisia monetary aggregates to the Governing Council at its meetings, but not to the public. Our European Divisia monetary aggregates will be expanded and refined, in collaboration with Wenjuan Chen at the Humboldt University of Berlin, to a complete EMU Divisia monetary aggregates database to be supplied to the public by the Center for Financial Stability in New York City.     

PERSONAL SECTOR MONEY DEMAND IN THE UK

Non-parametric demand analysis is utilised to establish weaklyseparable subsets of monetary assets for the UK personal sectorin the context of a utility function consisting of durable andnon-durable consumption goods, services, leisure, and monetaryassets The admissible collections of assets are then combinedusing Divisia aggregation in order to produce monetary aggregateswhich are consistent with economic aggregation theory We investigatethe money demand properties of the aggregates and find relativelysimple, stable long-run money-demand functions for the UK personalsector with well determined error correction dynamics.     

Money demand and monetary policy in Europe

Money Demand and Monetary Policy in Europe.—The European Central Bank will soon have to decide on her monetary strategy. This paper discusses properties of money demand functions and implications for monetary policy in a monetary targeting regime. Special attention is paid to different concepts of stability of money demand, to the length and variability of adjustment lags, and to the controllability of the money stock. At the European level, stable money demand functions are identified for M1 and M3. However, M3 appears to be less controllable than M1. Long and variable adjustment lags in the demand for M3 weaken the case for broad money as a monetary target. JEL no. E41, E52     

Policy rate pass-through and the adjustment of retail interest rates: Empirical evidence from Malaysian financial institutions

The paper examines the interest rate pass-through from money market rates to various retail rates in Malaysia within the framework of an error-correction model. We estimate the short- and long-run interest rate pass-through and analyse the asymmetric behaviour of financial institutions under different monetary regimes. The results show that both deposit and lending rate pass-throughs are incomplete. However, pass-through and speed of adjustment vary across financial institutions and retail rates. This analysis also shows that interest rate adjustments are asymmetric, with more significant adjustments taking place under monetary easing than under monetary tightening. These results provide support for the existence of the interest rate channel of monetary policy in Malaysia. There is thus a need to conduct effective monetary operations to support efficient monetary transmission in Malaysia.     

Currency Substitution and the Stability of the Demand for Money in East Asia

Abstract

This paper models and tests the stability of the demand for money in five East Asian countries—Indonesia, Malaysia, Philippines, Singapore, and Thailand—in the context of an open economy. The Johansen multivariate cointegration vector error correction analysis against quarterly data covering the period 1985:1–2001:4 was used. It was found that a stationary long run cointegrating relationship exists between broad money, real income, domestic interest rates, foreign interest rates corrected for exchange rate depreciation, and the expected rate of depreciation of the exchange rate. The results show that US Treasury bills rates and the foreign exchange rate vis-à-vis the US dollar play a significant role in the East Asian countries money demand relationship. This suggests that currency substitution vis-à-vis the US dollar may be an important consideration in the design and implementation of monetary policy in the East Asian countries. Furthermore, the results show that the Asian currency crises impacted the money demand functions negatively in these countries. CUSUM and CUSUMSQ stability tests show no evidence of parameter instability of the money demand functions in three of the five countries throughout the period under investigation.     

The Output Effects of Money Growth Uncertainty: Evidence from a Multivariate GARCH-in-Mean VAR

In this paper we extend the work in Serletis and Shahmoradi (Macroecon Dyn 10:652–666, 2006) by investigating the effects of money growth uncertainty on real economic activity, in the context of a multivariate framework in which a structural vector autoregression is modified to accommodate multivariate GARCH-in-Mean errors, as in Elder (J Money, Credit Bank 36:912–928, 2004). The model uses a recursive identification scheme, takes into account the possible interaction between conditional means and variances, isolates the effects of money growth volatility on output growth, and is able to explicitly model heteroskedasticity. We use quarterly data for the United States over the period from 1959:1 to 2005:4, provide a comparison among simple-sum, Divisia, and currency equivalent monetary aggregation procedures at each of the four levels of monetary aggregation—M1, M2, M3, and MZM—and find evidence that money growth volatility has significant negative effects on output growth. Issues of structural stability are addressed and sub-sample analysis is performed. Moreover, the robustness of the results to alternative identification schemes, alternative measures of the level of economic activity, and to the use of monthly observations is also investigated.     

Cointegration,error correction,and the demand for money in Mexico

Cointegration, Error Correction and the Demand for Money in Mexico. -Estimates of the long-run demand for narrow and broad definitions of the Mexican money supply over the period 1980Q1–1994Q1 suggest that a single cointegrating relationship exists for real money balances (M1 and M2), a scale variable (real GDP or real consumption expenditure), and the 91-day treasury bill rate. The results from short-run dynamic equations favor M2 as the monetary aggregate to target and suggest that real GDP rather than real private consumption is a more appropriate scale variable in the demand for money function for Mexico.     

The behavior of market interest rates when information is incomplete

Conclusions This paper has attempted to show how participants in financial markets, in the face of incomplete information about the supply of and demand for money, might go about formulating expectations of future interest rates in making market-clearing decisions. In particular, it was seen that information about the current excess demand for money, extracted from the current interest rate, could be used in formulating these expectations.In studying the behavior of the resulting market-clearing interest rate, two key conclusions emerged. First, relative to a full-in-formation market-clearing rate, where money supply and money demand were assumed observable, the market-clearing interest rate under signal extraction resulted in a biased response. Second, the bias was found to be related to the rates at which the disturbances to money demand and money supply dissipated. This suggested a role for monetary policy in reducing this bias. But, conversely, this also showed that monetary policy could be a source of volatility of market-clearing interest rates, relative to their full-information values.     

The Money-prices Nexus for Malaysia: New Empirical Evidence from the Time-varying Cointegration and Causality Tests

Abstract

The main objective of this study is to empirically re-investigate the money-prices nexus for Malaysia through the Johansen multivariate cointegration and the modified Wald (MWALD) causality techniques. This study covered the monthly dataset from 1971:M1 to 2008:M11. The Johansen cointegration test suggests that the variables under investigation are co-move in the long run. Furthermore, the MWALD causality test shows a bidirectional causal relationship between money supply (M2) and aggregate prices, meaning that both the monetarist's and also the structuralists' views are vindicated in the Malaysian economy. However, the time-varying cointegration and causality tests indicate that the cointegrating and also the causal relationships are not stable over the analysis period. These results suggest that inflation in Malaysia is not purely a monetary phenomenon. Therefore, implementing a tighter monetary policy may not be an effective macro-economic instrument in managing the inflationary behaviour in the Malaysian economy.     

Velocity Effects of Increased Variability in Monetary Growth in Egypt: A Test of Friedman's Velocity Hypothesis

Abstract: This paper tests Friedman's hypothesis that increased variability in the growth of money supply causes velocity to decline, using Egyptian data from the period 1960–99. The monetary aggregates M1 and M2 are decomposed into anticipated and unanticipated components and the variability of money growth is computed as the standard deviation of five years of monetary growth rates. Cointegration tests show that there is a statistically significant long‐run relationship between the variability in money growth and velocity, for both M1 and M2. However, while increased variability in the growth of M2 is found to be associated with lower velocity — supporting Friedman's velocity hypothesis — increased variability in the growth of M1 seems to have no influence on velocity, possibly because the definition of M1 has changed over time. The findings also suggest that anticipated movements in M2 volatility are not neutral, in the sense that they do affect velocity. An important implication is that the scope for discretionary monetary policy in Egypt is somewhat circumscribed in the short run. However, if the Central Bank of Egypt were to make its decisions more transparent and pre‐announce its policies, then velocity would be more predictable and monetary policy more potent.     

Interest Rates, Leverage, and Money

The current mainstream approach to monetary policy is based on the New Keynesian model and is expressed in terms of a short-term nominal interest, such as the federal funds rate in the United States. It ignores the role of leverage and also downplays the role of money in basic monetary theory and monetary policy analysis. But as the federal funds rate has reached the zero lower bound and the Federal Reserve is in a liquidity trap, the issue is whether there is a useful role of leverage and monetary aggregates in monetary policy and business cycle analysis. We address these issues and argue that there is a need for financial stability policies to manage the leverage cycle and reduce the procyclicality of the financial system. We also argue that in the aftermath of the global financial crisis and Great Contraction there is a need to get away from the New Keynesian thinking and back toward a quantity theory approach to monetary policy, based on properly measured monetary aggregates, such as the new Center for Financial Stability Divisia monetary aggregates.     

Post-crisis monetary and exchange rate policies in Indonesia,Malaysia and Thailands

This paper surveys the post-crisis monetary and exchange rate policies of Indonesia, Thailand and Malaysia. Malaysia has pegged the ringgit while Indonesia and Thailand have adopted heavily managed exchange rates. Under their IMF programs, Thailand and Indonesia set base money targets, but Thailand has moved, and Indonesia is now moving, to inflation targeting, using interest rates as the short-term instrument. Malaysia also sets interest rates. The ability of the three central banks to set interest rates and also pursue an exchange rate target with an interest rate target has been bolstered by restrictions on the internationalisation of the domestic currency. The three central banks have also had to sterilise the monetary effects of their foreign exchange interventions. It is argued that inflation targeting is now a good policy choice, but that a more freely floating exchange rate would be better than sterilisation of balance of payments surpluses or deficits.     

中国M2／GDP过高的成因分析及调控路径选择——基于动态超调与跨期权衡视角

本文以动态IS-LM-BP模型为基础,以跨期权衡为出发点,以国际货币供给失衡以及中国拥有巨额外汇储备为研究背景,对M2/GDP持续走高这一经济现象进行了分析。结论认为,M2/GDP的变化并非单一的货币现象,而是受循环于实物经济体系之外的货币供给量的变化以及国际贸易不均衡、金融制度扭曲、经济结构缺陷等一系列因素的影响,我国金融管理当局应使用各种政策的组合来调整M2与GDP产出的关系。     

中美“宽松”货币政策、通胀预期与货币规则的探讨

2008年10月以来,中美两国均采取了不同程度的"宽松"货币政策来应对源于美国金融危机的全球经济衰退。本文的研究显示,2008年,中美两国货币供应量M1和M2增长率是相似的;2008年底到2009年8月,中国的M1和M2增长率分别为20.6%和21.4%,而美国的M1和M2增长率仅为3.36%和2.14%,中国的通胀预期是市场对"超级宽松"货币政策的合理反应。在过去的一年间,中国货币当局对美国金融危机的反应比美国的政策干预更为积极。而货币供应量的高增长孕育着价格上涨的风险,货币政策应当从被动协调美国的相机抉择转向遵循货币数量规则,抑制通胀预期,以实现宏观经济的稳定增长。     

Wealth and the demand for money: Empirical evidence for the Netherlands and Belgium

Summary This paper examines the impact of wealth on the demand for money in The Netherlands and Belgium. The empirical analysis reveals a substantial influence of wealth on the demand for money. For The Netherlands, incorporating wealth effects mitigates the volatility of the monetary picture. For Belgium this is not the case, indicating that interest and inflation rates are very important for understanding the monetary developments.We are indebted to Michel Dombrecht of De Nationale Bank van België for providing the data on wealth for Belgium. Helpful comments by Professors S.K. Kuipers and F.C. Palm are gratefully acknowledged.     

Determinants of Malaysian Trade Balance: An ARDL Bound Testing Approach

Abstract

This paper examines the short- and long-run relationships between trade balance, real exchange rates, income and money supply in the case of Malaysia. The inclusion of income and money variables in the study is purposely to examine the monetary and absorption approaches to the balance of payments beside the conventional approach of elasticity, using exchange rates. Using the bound testing approach to cointegration and error correction models, developed within an autoregressive distributed lag (ARDL) framework, we investigate whether a long-run equilibrium relationship exists between trade balance and the determinants. Additionally, we adopt an innovation accounting by simulating variance decompositions (VDC) and impulse response functions (IRF) for further inferences. Using this approach, we find evidence of a long-run relationship between trade balance and income and money supply variables but not between trade balance and real exchange rate. The findings also suggest that Marshall–Lerner condition does not hold in the long-run for Malaysia and for policy wise the Malaysian trade balance/balance of payments should be viewed from absorption and monetary approaches.