Examine Stability of Demand for Money in Malaysia : Using Autoregressive Distributed Lag (ARDL) Model

The main purpose of this research is to examine the stability of demand for money (M2 and M3) from year in Malaysia using quarterly data over the period 1982: 1 to 2009: 4 using the Autoregressive Distributed Lag. The macroeconomic variables that I used in this thesis are GDP, interest rate, exchange rate, and stock price. The estimated results of GDP, interest rate, exchange rate and stock price (KLCI) with respect to monetary aggregate can be used to determine the stability of money demand. The cointegration, error correction model (ECM), Autoregressive Distributed Lag (ARDL) and CUSUM and CUSUM of squared test has been applied for empirical analysis. In this thesis, I used bound test to test long run relationship. The test results reveal that, there exist a long run and short run relationship among the variables. The long run demand for money for M2 and M3 are specified and estimate by using ARDL approach. The calculated error term from the long run monetary aggregate M2 and M3 are then used in the error correction model (ECM) of M2 and M3 respectively. The result shows that only GDP and KLCI have relationship with monetary aggregate (M2) in long run and short run. Meanwhile for monetary aggregate of M3 just Treasury bill rate and stock price (KLCI) have relationship in short run and long run. Finally, the results of the CUSUM and CUSUM of square test suggest that the estimated demand functions are stable. In a policy context, this finding actually to bring knowledge to policy maker that stability of money demand is very important to know how much money to be hold and to control our economy. Based on the result in the long run and short determinants of monetary aggregate can be used when drawing a policy.