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

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.