The Relationship Between Monetary Growth and the Money Market Rates: The Malaysian Experience

Abstract

It is widely. believed that the market interest rates follow a sequential time path in response in the monetary growth rate. The exact pattern of the response receives greater attention tary field as it reflects the effectiveness of the money supply as conduits of monetary ‘This study examines the issue in the Malaysian financial market. The increase in the rate and variability of the money supply are highly associated with the high level and of interest rates with certain lags. In the Malaysian financial market, the inverse ip of monetary growth and interest rates (the liquidity effect) lat for about 13 months initial changes in the money supply, thereafter, the direction of the interest rate response itive. However, the positive response (income and price level effects) is not significant ‘Malaysian economy. There is u high possibility that the magnitude of these three effects Be affected by the financial marke liberalization that is taking place in the Malaysian + The results of causality tests conclude with the endogeneity of monetary growth. is unidirectional, running from interbank rates to monetary growth. The findings can ined by the low inflation economy and possibly the low level of efficiency in the san financial market. The pattem of causation implies the adoption of interest rate targeting by the central bank. In addition, it aso supports the use of the KLIBOR (Kuala Lumpur Offer Rates) as measures of liquidity in the Malaysian economy. Smportance of the supply of money as the determinant of economic variables has been a al issue in the monetary debate (see Patinkin (1989), Friedman and Schwartz (1982), (1978). Theoretically, interest rates are believed to follow a sequence of responses