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The feasibility of inflation targeting in Malaysia

Author

Listed:
  • Wai-Ching Poon

    (Monash University Malaysia)

  • Gee-Kok Tong

    (Multimedia University)

Abstract

This paper aims to examine whether inflation targeting fits in Malaysia. The relationship between CPI, money supply (M1), money market rate, and exchange rate of the Malaysian economies from 1976:M1 to 2007:M12 is tested, considering the major transmission mechanism channels in the conduct of monetary policy stance. The Johansen-Juselius (JJ) multivariate cointegration procedure and Vector Error Correction Modelling (VECM) are applied to investigate the joint dynamics variables for both short and long run. Results reveal cointegration between CPI and exchange rate, money market rate, and money supply. Results show that changes in interest rate and exchange rate have significantly impacted the CPI in Malaysia in the short run, but insignificant from money supply. Inflation targeting may not fit in Malaysia because of its economic structure and institution may not be conducive at the current stage.

Suggested Citation

  • Wai-Ching Poon & Gee-Kok Tong, 2009. "The feasibility of inflation targeting in Malaysia," Economics Bulletin, AccessEcon, vol. 29(2), pages 1035-1045.
    • Handle: RePEc:ebl:ecbull:eb-08e60016
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    References listed on IDEAS

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    Cited by:

    1. Wai Ching Poon & Yong Shen Lee, 2014. "Inflation Targeting in ASEAN-10," South African Journal of Economics, Economic Society of South Africa, vol. 82(1), pages 141-157, March.
    2. Arshi Shahid & Hafiz Khalil Ahmad & Saima Liaqat, 2020. "Inflation, Globalization and Interest Rate Nexus to Curb Price volatility: An Empirical Cross-Country Analysis," Global Economics Review, Humanity Only, vol. 5(1), pages 153-165, March.
    3. Ndiaye, Ndeye Djiba & Masih, Mansur, 2017. "Is inflation targeting the proper monetary policy regime in a dual banking system? new evidence from ARDL bounds test," MPRA Paper 79420, University Library of Munich, Germany.
    4. Hamzah, Nurrawaida Husna & Masih, Mansur, 2018. "Revisiting effectiveness of interest rate as a tool to control inflation: evidence from Malaysia based on ARDL and NARDL," MPRA Paper 87576, University Library of Munich, Germany.

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    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • E0 - Macroeconomics and Monetary Economics - - General

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