June 2017 – Page 6 – Regional Science Inquiry

Payam MOHAMMAD ALIHA

Ph.D candidate, National University of Malaysia (UKM), Malaysia

payammaliha@gmail.com

Tamat SARMIDI

Associate Professor Dr. at Faculty of Economics and Management, Universiti Kebangsaan Malaysia (UKM), Malaysia

tamat@ukm.edu.my

Abu Hassan SHAAR

Professor Dr. at Faculty of Economics and Management, Universiti Kebangsaan Malaysia (UKM), Malaysia

ahassan@ukm.edu.my

Fathin FAIZAH SAID

Dr. at Faculty of Economics and Management, Universiti Kebangsaan Malaysia (UKM), Malaysia

fatin@ukm.edu.my

Abstract

Money demand function plays a vital role in monetary policy formulation. Over the years, several countries have experienced growth in financial innovation which has implications for monetary policy. This paper estimates the relationship between financial innovation and money demand in Malaysia with a focus on payment instruments (PI), payment systems (PS) and payment channels (PC) using the ARDL approach to cointegration between 2008 Q1 to 2015 Q4. This paper adopts the bounds testing procedure developed by Pesaran et al. (2001) to test the stability of the long-run money demand and determine the short-run dynamics for Malaysia. The empirical evidence points to the fact that while innovation in the Malaysian financial system have not ruled out the existence of stable long run money demand relationships as attested to by QUSUM Test, they (except for PS) fail to pass the Bound Test meaning that there is no evidence for a long-run association between variables. Therefore, for PI and PC, we cannot proceed to the next step. For PS, the estimated coefficient for the error correction term is not significant which means that there is no adjustment towards long-run equilibrium. In other words, disequilibrium between money demand and independent variables is not corrected over time and it actually diverges rather than converge.

Keywords: Money demand, Financial innovations, Stability, ARDL, Cointegration

JEL classification: C13, C40, C51, E40, E44

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Hiroshi SAKAMOTO

Research Associate Professor Asian Growth Research Institute (AGI) 11-4 Otemachi, Kokurakita, Kitakyushu, 803-0814 JAPAN Tel: +81 93 583 6202; Fax: +81 93 583 4602

sakamoto@agi.or.jp

Abstract

Economic contagion is increasingly felt as economic interdependence deepens in today’s economy. This study quantitatively investigates how economic shocks of a certain country influence a different country. Usually, a positive shock has a positive influence, and a negative shock has a negative influence. For instance, the monetary crisis of Europe affected the Asian economy as well as the economy of Europe itself. The Chinese economy, which recently accomplished the most remarkable economic growth in the Asian region, has also declined in rates of growth, and has become a risk factor for the global economy. The downturn of the economy in regions with economic power may have a negative influence on the economy of other countries. Under such circumstances, this study quantitatively analyzes the economic shock influence of a certain country to other countries, at the same time there is a possibility of influence to the opposite direction supposing the economic shock occurs under uncertainty. The model employed in the study uses the general algebraic modeling system (GAMS), it uses the global trade analysis project (GTAP) database, which is compiled as a computable general equilibrium (CGE) model using multiple countries’ data. Moreover, this database is constantly updated to a recent year to feature more realistic knowledge. Furthermore, this study uses the Monte Carlo experiment to model uncertainty. This is realizable by adding the random number of a normal distribution to the exogenous variables of the model.

Keywords: Economic Contagion, Multi-country Computable General Equilibrium Model, Monte Carlo Experiment

JEL classification: C15, C68, D58, O53, R13