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• W1485105378 abstract "This is essentially a three-part thesis on money demand, bank credit and real exchange rates inMalaysia. Long and short run real money demand functions with money variously defined asMO, M1 and M2 have been estimated using the Johansen cointegration technique and the errorcorrection approach respectively. While liberalisation and innovation in the Malaysian financialsystem have not ruled out the existence of stable long run money demand relationships asattested to by the presence of cointegrating vectors, they have rendered short run relationshipsunstable. This called for a reestimation of short run dynamics over more recent periods and allthe revised estimates could withstand a battery of diagnostic tests akin to original full sampleestimates. The estimated short run functions appear to track the direction of actual changes inthe demand for money reasonably well.The second part of the thesis is basically concerned with the possible practice of equilibriumcredit rationing (a la Stiglitz & Weiss, 1981 & 1983) amongst commercial banks in Malaysiaand the significance of commercial bank credit vis-a-vis other monetary variables in thedetermination of economic activity in Malaysia. Two of the major implications of equilibriumcredit rationing are the irresponsiveness of lending rates to changes in the factors determiningloan demand and supply and the presence of a 'ceiling' on the lending rate. Via an applicationof cointegration and error correction techniques, the lending rate is found to be insensitive todeterminants of loan demand while only nominally sensitive to loan supply determinants. Thisis corroborated by an evidence derived from an application of Sims' VAR technique thatshows a lack of responsiveness of the lending rate to changes in the inter bank rate used as aproxy for the cost of financial market funds.With regard to the ceiling on the lending rate arising from equilibrium credit rationing, itseffect on the volume of deposits and hence loanable funds mobilised by banks and the interestrate payable on them may depend on the interest elasticity of their flows. Two separate casescan be considered namely the case of zero elasticity and the case of non zero elasticity. In theformer case, if it is against the banks' interests to impose a high lending rate owing to possibleadverse selection effects, banks may suppress the deposit rate instead. In the latter casehowever, the higher is the interest elasticity of deposits, the greater will be the amount ofloanable funds derived and the interest rate paid on them. In our empirical analysis involvingthe application of cointegration and error correction techniques, commercial bank deposits inMalaysia are found to have a zero elasticity in the short run. Hence the extent of excessdemand arising from an any practice of equilibrium credit rationing may be relatively limited.By applying the Sims' VAR technique, commercial bank credit has been found to exert agreater influence than MI, M2 and the lending rate on the Malaysian GDP.The final part of the thesis pertains to exchange rates. In an adaptation of Dornbusch's (1976)model, it appears that any policy measure aimed at alleviating the asymmetric informationproblem in the domestic banking system could lead to a depreciation in the long runequilibrium exchange rate and a rise in the long run equilibrium price level. The impact effectsare a weaker domestic currency and a higher output level. However the magnitude of the longrun and impact effects would vary directly with the interest elasticity of money demand.The cointegration and error correction techniques have also been relied upon for estimatingthe long run equilibrium real effective and bilateral exchange rates of Malaysia and the shortrun dynamics of these rates a la Edwards (1988a, 1988b & 1989). The estimates suggest thatthere has been no sustained overvaluation or undervaluation of the Malaysian real exchangerates. By implication then, the question of a real exchange rate misalignment does not ariseand that Malaysia's success in economic development so far has not been due to any deliberateundervaluation policy. Moreover the analysis of causal relationships amongst real exchangerate movements on one hand and exports and GDP on the other has highlighted no significantrelationships existing between them. Finally, the results from modelling the short run dynamicsof real effective exchange rates indicate that excess domestic credit could induce theirdepreciation instead of an appreciation, contrary to popular belief." @default.
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• W1485105378 date "1995-03-01" @default.
• W1485105378 modified "2023-09-24" @default.
• W1485105378 title "Money demand, bank credit and real exchange rates in a small open developing economy : an econometric analysis for Malaysia" @default.
• W1485105378 hasPublicationYear "1995" @default.
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