Malaysian Money Demand Function Revisited: The ARDL Approach

ABSTRACT

This article examines the long-run and short-run behavior of the demand for money (M1, M2, and M3) in Malaysia. In this study we used a robust estimation known as the unrestricted error correction model (UECM) and the Bounds test (Pesaran, Shin, &; Smith, 2001 Pesaran, H., Shin, Y. and Smith, R. J. 2001. Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16: 289–326. [Crossref], [Web of Science ®] , [Google Scholar]) to determine if the demand for money is cointegrated with real income, interest rate, and the price level. Prior to the cointegration analysis, we tested whether the demand for money series had undergone any structural breaks due to the 1997 Asian financial crisis using the Gregory–Hansen structural break approach. The study used annual data from 1970 to 2004. The Gregory–Hansen test suggests that the 1997 Asian financial crisis did not have a significant impact on the cointegration relationship between money demand and its determinants. The Bounds test revealed that the demand for M1, M2, and M3 are cointegrated with its determinants at the 1% level of significance. Thus, the long-run demand for money was found to be stable. This implies that monetary targeting may be a useful for the conduct of the monetary policy.