Abstract
The paper analyzes empirically the money-price link for the case of Malaysia using quarterly data from 1978 to 2006. Looking at the correlations between cyclical components of monetary aggregates (M1, M2 and M3) and of the price level, we note that the significant correlations documented between money and price during 1978–1987 tend to disappear or become perverse during late 1980s and 1990s. However, for the case of M2 and M3 monetary aggregates, their significant relations with the price level reemerge during 1998–2006. While time series analyses of cointegration and vector autoregressions (VAR) are uncertain in suggesting the pre-1998 relations between broader monetary aggregates (M2 and M3) and the price level, we note the declining role of M1 monetary aggregate in anticipating future variations in the price level for the recent sample. However, the significant causal influences of M2 and M3 are apparent post-1998. Our results further suggest 4–6-quarter lagged effect of monetary aggregates on the price level. We tend to conclude that the broad monetary aggregates especially M3 is useful for the conduct of monetary policy.
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Notes
Another well known band-pass filter is the BK filter proposed by Baxter and King (1999). However, the use of the BK filter unnecessarily shortens our cyclical series and, consequently, constraints our sub-sample analyses. The CF filter, however, dominates the BK filter since it “fully exploits the entire data set” (Christiano and Fitzgerald 2003, p. 459) and there is no loss of observations.
The cross-correlations are computed for 10-quarter leads and lags. Given that the maximum correlations are attained at lag 5 or less, we report only up until 5-quarter leads and lags.
To conserve space, the results are not reported but available from the author upon request.
An alternative ordering is to place the monetary variable last. This ordering presumes that the monetary authority is forward looking anticipating changes in inflation and real activity.
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I would like to express my thanks to the two anonymous referees of the journal for providing very useful comments on the earlier draft of the paper. However, the remaining errors are my own responsibility.
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Ibrahim, M.H. Money-price relation in Malaysia: has it disappeared or strengthened?. Econ Change Restruct 43, 303–322 (2010). https://doi.org/10.1007/s10644-010-9097-1
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DOI: https://doi.org/10.1007/s10644-010-9097-1