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Bank Lending and Inflation in Malaysia: Assessment from Unrestricted Error‐Correction Models
Author(s) -
Tang Tuck Cheong
Publication year - 2001
Publication title -
asian economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.345
H-Index - 28
eISSN - 1467-8381
pISSN - 1351-3958
DOI - 10.1111/1467-8381.00134
Subject(s) - economics , inflation (cosmology) , depreciation (economics) , error correction model , econometrics , sample (material) , macroeconomics , monetary economics , cointegration , microeconomics , profit (economics) , chemistry , physics , capital formation , chromatography , financial capital , theoretical physics
The paper estimates inflation models for Malaysia by considering the influence of bank lending. The unrestricted error‐correction model (UECM) proposed in Pesaran et al. (2000) was employed as being appropriate for small sample analysis such as the present study which covered annual data from 1973 to 1997. The results of ‘bounds’ tests confirmed a long‐run equilibrium relationship between inflation and its determinants, namely import price, money supply (M3), bank credit and real income. The estimated UECMs revealed that the important factors in the Malaysian inflation process are import price and real‐income variables. It was found that concurrent fiscal policies had a major influence on the impact of the depreciation of the naira on inflation. The UECMs appear to perform well and to provide an appropriate framework for forecasting the Malaysian inflation behaviour.