Money Supply and Economic Activities in Malaysia

Abstract

This study examined how economic activities affect the direction of money supply in Malaysia. The overnight policy rate is the interest rate set by Bank Negara Malaysia (BNM) as its monetary policy tool. Based on the Keynesian Economic Theory, the autoregressive distributed lag (ARDL) model was applied to analyse how the industrial production index, interest rate and consumer price index influenced money supply.  The findings of this study supported the notion that economic growth significantly affected the money supply in the short run. There was no evidence of such a relationship in the long run.  Maintaining a stable money supply is vital to limit adverse variations in economic activity.  A stable money supply allows Malaysia to respond effectively during difficult times, especially the current covid19 pandemic.