The Uncertainty of the U.S. and Japanese Interest Rates and Its Effect on Money Demand in Malaysia

Abstract

This paper examines the effect of the volatility of the U.S. and Japanese interest rates on the money demand in Malaysia. The volatility of the U.S. and Japanese interest rates measured as a conditional variance are estimated from the GARCH(1,I) model. The long-term relationship between real money demand in Malaysia and the volatility of the U.S., and between real money demand in Malaysia and Japanese interest rates are investigated by applying the Johansen multivariate cointegration test. Results show that the volatility of the U. S. and Japanese interest rates impose a significant influence in money demand in Malaysia. However, the opportunity cost of holding money remains to impose a larger effect on the money demand function.