Money Demand and the Role of Foreign Financial Variables: Evidence from Malaysia

This paper estimates the effect of foreign financial variables on money demand in Malaysia. The study fits the bounds testing approach to cointegration on quarterly data over the period 1991-2005. The test finds a single cointegration relation among the variables. However, the results of FMOLS model indicate that the coefficients of real income, real exchange rate and foreign interest rate are correctly signed and significant at 1 per cent level. Additionally, the error-correction term which measures the speed of adjustment is correctly signed and significant at 1 per cent level, suggesting that approximately 26 per cent of total disequilibrium in real money demand was being corrected in each quarter in Malaysia