Ghazali, Noor Azlan and Ramlee, Shamsubaridah
(2001)
Long Run Equilibrium Relationship Between Money And
Prices In Selected Asian Countries.
Asian Academy of Management Journal (AAMJ), 6 (2).
pp. 1-19.
ISSN 1394-2603
Abstract
The Monetarists proposition of the relationship between the growth of money and
changes in prices is investigated for eight selected Asian countries (Bangladesh, India,
Indonesia, Malaysia, Pakistan, Singapore and Thailand). Specifically, the long run
equilibrium relationship between growth of money stock and changes in prices is
examined based on three framework of analysis; cointegration analysis, error correction
model and impulse response functions of a vector autoregression analysis (VAR). The
results are in favour of the Monetarists proposition . Money growth and changes in
prices are shown to be cointegrated in all countries. Movement in changes in prices is
subject to its deviation from long run equilibrium path determined by growth in
monetary aggregate. The speed of adjustment of prices toward its long run equilibrium
path and the explanatory power of growth of monetary aggregate in explaining
inflation remain regardless of the measures of money employed . The impact of changes
in money on prices is permanent and significant. Reactions of prices are immediate in
India, Indonesia, Malaysia and T hailand but delayed in other countries. It begins to
occur after some lag following monetary injection . The speed of adjustment of changes
in prices toward its long run equilibrium is significant in all countries with Bangladesh
recording the highest speed of adjustment of a near to complete correction. The
evidence presented highlights the importance of domestic monetary controls in
managing inflation in each of these countries. Monetarism is alive and valid in these
developing nations of Asia
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